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What is refinancing and why should I consider it?
As far as finances go, buying a home is one of the most significant decisions you may ever make. And just like buying a perfect pair of jeans may require some patchwork over the years, long-term real estate ownership comes with upkeep and adjustments along the way. One of the ways to ensure that you’re getting the most out of your investment is through refinancing: replacing your initial mortgage with a newer, more suitable loan to compliment the time and place you’re in.
But for those who struggle with any combination of indecision, commitments, or economic strategy, the term “finance” itself can be enough to demoralize your efforts. But don’t give up just yet, we broke it down for you into a digestible, straightforward guide on a topic that all prospective or current homeowners should be privy to: refinancing.
Let’s take it from the top, you buy a house and take out a mortgage to finance the next “X” number of years it will take you to have full equity on your home. Mortgages are some of the lengthiest loans out there, with the most average mortgage in the U.S. being about 25 years. This gives the economy 25 years to fluctuate its interest rates, and 25 years for your personal and financial situation to change with it. So why not update your loan to best match all three variables as they change?
That’s where refinancing comes into play. There are a few common reasons homeowners choose to refinance:
- When the current interest rates are lower than they were when the loan was taken out
- To change the duration of the loan; either the buyer is able to pay off the mortgage quicker than expected, or is looking to extend in exchange for a lower monthly rate
- To ditch a private mortgage insurance (PMI)
- To “cash-out” on a portion of the buyer’s equity in the property
- To switch from an adjustable-rate mortgage (ARM) to a fixed-mortgage
If you think you might fall into one of these categories, or you’re curious how to best go about this decision, the rest of this article is made just for you!
The first point on the list will depend on the interest rates at the time of refinance consideration compared to those at the time of one’s initial loan. Interest rates depend on the state of the market itself, as well as personal economics such as the buyer’s credit score. So, if your credit score has gone up since taking out your loan or the banks are offering lower rates overall, it’s a good time to consider refinancing.
Each month that a homeowner is paying off their mortgage is another month of paying interest. For those willing to make the tradeoff between greater overall costs in exchange for lower monthly payments, then a lengthier loan may be ideal. Refinancing can help you to reduce your stress each month, simply by replacing your current loan with a lengthier one. But say you just scored an unanticipated sum of money and you’re looking to put that towards your home equity to cut back on the duration of your loan, refinancing could help you to significantly reduce your overall costs.
Now let’s talk private mortgage insurance. These are usually a requirement for buyers who are both making a down payment of less than 20 percent and using a conventional loan. If your equity has increased since you took out your mortgage to be more than 20 percent, you may be able to refinance, say goodbye to your PMI, and save lots of money on your monthly payment.
Cash-out refinancing is another popular way to modify your mortgage, and who doesn’t love having extra cash on hand? This choice allows you to take back a portion of your equity in cash, rather than keeping it in the bank. This strategy is a smart one if you need a loan that would come with a higher interest rate than a cash-out refinance would entail. For instance, personal loans or credit card debts could be costly and unnecessary if you already have capital that you could get your hands on from your own equity. This process is done by refinancing your existing loan with a new, high-balance mortgage. The difference between the two loans would be given to the owner as cash.
Are you still with us? We’re almost there!
So, there are two different types of mortgages (well…at least in regard to this topic): adjustable-rate and fixed mortgages. ARM’s fluctuate with market interest rates. So, if you initially got an ARM mortgage at a low-interest rate, but now, 10 years later, interest rates have risen, refinancing to a fixed-rate mortgage may alleviate future increases, and therefore costs for you. If you’re planning to stay in your home for a long time, fixed rates are usually a good bet as they’ll lock you in at what is (probably) a lower rate. Be sure to be knowledgeable on the current interest rates before making this decision. If you are getting a mortgage at a time when interest rates are high, it may be best to go for an ARM…and you can always switch later on.
So, you think refinancing might be the right decision for you, now what?
Unfortunately, like most things in life, it comes at a cost. Refinancing fees typically cost between 2-3% of the mortgage. This might seem hefty, but the savings often outshine the costs. And thankfully, it’s easy to figure out if they do. Simply divide the total cost of refinancing by your monthly savings. This will equal the number of months it will take for you to break even on your exchange. If you’re planning to be in your house longer than this number of months, it probably makes sense to go for the refinancing. If not, probably best to stick it out with your current loan.
If you are reading through this thinking “OMG the stars are aligning, refinancing is the one for me”, it’s time to clear that last hurdle and make sure you are eligible. If it seems like we’re being tedious, we are. You shouldn’t have to go through a process that’s not right for you, so we want to make sure that it is! But good news, if you have a steady income, a credit score above 620, at least 20 percent equity, and a history of on-time payments, things are looking good for you.
I’m ready to refinance, now what?
Alright, all the boxes are checked and you’re ready to refinance. Rates and closing costs will vary between lenders, and you want to be sure you’re getting the best bang for your buck. That’s where Refily comes in. Refily is a technology-driven lender comparison marketplace, pairing technology with personalized assistance to ensure the user is getting the best deal possible. Just plug in all your preferences into Refily’s platform and let them take care of the rest. They’ll bring you to your most suitable lender and allow you to compare them to others based on estimated rates, costs, fees…the whole package.
The hardest part of refinancing is figuring out if it’s right for you. If you’re not sure, check out Refily’s free comparison technology and see if it becomes any clearer. They’re truly there to make the buyer’s experience as smooth as refinancing can be. If you’ve made it this far, it seems like you should at least scope out your options! Let Refily do the rest.
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