What Does It Mean to Refinance Your House?
It might surprise you to learn that about 38 percent of American homeowners don’t know what the interest rate is on their mortgage. Your interest rate has a huge impact on the overall amount you’ll end up paying for your home.
Sometimes, people purchase homes when their credit or the market isn’t optimal and end up with an unfavourable interest rate.
If you aren’t happy with your current mortgage, you might be considering whether you should finance your home. What does it mean to refinance your house, though? We answer this question and much more below!
What Does It Mean to Refinance Your House?
Refinancing your home basically means that you are swapping your mortgage for another one. Most of the time, your new mortgage will have a different interest rate, term, and principal. Most people choose to refinance their homes in order to obtain some sort of financial benefit.
In general, there are three different types of home refinancing: cash-in, cash-out, and rate and term refinance.
Cash-In Refinance
A cash-in refinance is when the homeowner has a significant amount of cash on hand that they want to use to pay down the balance of the loan when they refinance.
Many people opt to do this in order to get a better interest rate from a particular lender and to reduce the length of the loan term.
Some interest rates are based on the amount of the loan. In order to lock in a lower interest rate, the homeowner needs to reduce the amount of the principal.
This is described as the loan-to-value ratio (LTV). Higher LTVs tend to have higher interest rates.
Cash-Out Refinance
A cash-out refinance is a tool used by homeowners to get cash for the equity they have in their homes. Equity is essentially the money you’d be left with were you to sell your home today.
This means that if you have a home valued at $200,000, and you only owe $50,000, you’d have $150,000 in equity.
The only way to access the equity in your home without selling it is to refinance your home. The balance on your new mortgage will be higher than the one you have now.
The new loan pays off the balance of your old loan, and the rest is paid to you in cash at the closing of the loan.
In general, cash-out mortgages are riskier for lenders, and thus are more difficult to qualify for.
Rate and Term Refinance
A rate and term refinance is one of the most common types of refinance. This allows homeowners to augment their mortgage with a different rate or loan term. The goal of this type of refinancing is to save the homeowner money or reduce the amount of time you’ll be paying on the loan.
Refinancing your home for a shorter term might cost you more per month, but it can save you a significant amount of money in interest, reducing the amount of money you pay overall.
Is It Time to Refinance Your Home?
There are many ways to refinance your home, but how do you know when it’s the right time to refinance?
This is an important question to ask because, like with your initial mortgage, your refinance will require you to pay between 3 and 6 percent of the loan principal. The benefit must be greater than the cost of the refinance.
Like the stock market, the market for mortgages has its ups and downs. There are certain times when interest rates drop significantly.
When that occurs, it’s not a bad idea to look into your options and see if you save on interest.
The same is true if your credit improves after your purchase your home or if you purchased your home with an adjustable-rate mortgage.
Refinancing may be able to help you stabilize your payments and reduce your overall interest rate.
If you still aren’t sure whether now is the right time to refinance your house, don’t stress. You can learn more here before you decide to pull the trigger!
How to Refinance Your Home
If you’re thinking about refinancing your home, you might be wondering what the process looks like. Like purchasing a house, refinancing your house involves many different steps before the process is complete.
The first thing you want to do is determine why you’re thinking of refinancing. Do you want to pay down the principal and get a lower interest rate, or do you want to reduce your monthly payments to save money in the shorter term? Having this in mind will help guide your search.
The next thing you need to do is to make sure that your credit is in good shape. Pull your credit report and make sure that it’s free from errors to ensure that you’re not going to get dinged on interest rates.
Once that is done, it’s time to look at different lenders and the type of interest rates that they’re offering, and apply for refinancing using a preapproval tool.
After selecting a lender and the terms of the mortgage, your home will need to be appraised within 60 to 90 days of approval. If your home appraises, then you will move into closing on the loan.
This will include closing fees, so make sure you have money set aside for that part of the process.
These Refinancing Tips Are Essential for Success!
What does it mean to refinance your house?
The answer to this question depends upon what you’d like to get out of your refinance experience. For some, it’ll mean getting a lower payment, and for others, it means paying off their mortgage sooner.
No matter what you want to get out of refinancing your house, make sure to do your research on the lenders and the terms to ensure you’re getting the best deal possible.
Do you want to learn more awesome ways to keep your financial life in check? You’ve come to the right place!
Take some time to check out the rest of our blog for tons of fantastic financial tips and tricks!
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