In almost all cases when owning a home, one accompanying item is saddled with it: a mortgage. A necessary component everyone must deal with. However, with a home refinance, you may be able to do a little restructuring of the loan terms to help you knock down your monthly rate, the length of the loan term, or even tap your home’s equity to get access to a large, if one-time, influx of cash to help pay off debt or fund personal projects. Though there are lots of potential positives to getting a home refi, for some people it may not be in their best interest. Therefore, it is not something that you should charge into without understanding the basic constructs and their respective consequences. So let’s delve into some of the basics.
When mulling over the decision of whether or not to get refinancing, it is best to ask yourself these important questions:
- Does my house have equity? To qualify for a new loan, it is commonplace to require at least a 20 percent equity. If your house’s value is below the mortgage value, it can be very difficult, albeit not impossible, to acquire a refi.
- Is my credit in good shape? Your credit score carries big time weight in the financial world. It can either give you the power or completely strip away the capacity to secure funds for all sorts of endeavors. Having a good credit score not only lets you acquire financing, but also gives you the edge in negotiating much more favorable terms on securing a great new rate. If your score is below 620, if may prove difficult to secure any tangibly positive results.
- Where are you on your current mortgage? If you are someone who is very far along on your original mortgage, there is little to no benefit in a refinance, which would end in only a loss of equity and put you deeper into the hole. Extracting a second mortgage on a house instead of tweaking the one you already have can severely diminish your home’s equity even more and would make a refinance fruitless. Lastly, if you are planning to move shortly, then it is best not to take on the additional costs of a refi, such as closing costs.
After going over some of the more fundamental questions to ask yourself whether or not a home refi is right for you, you may come to the conclusion that it is. So here are some of the options you can explore:
- A main reason most people get a refi is to lower the monthly payments that come with a mortgage by lowering the APR, or annual percentage rate. Knocking it down a few points can save you hundreds if not thousands in the long term, but additional costs that come coupled with the new loan may negate these gains. It goes on a case by case basis that must be calculated and analyzed to see what benefits are to be had. Another simple way to lower your costs is to stretch out the loan by an additional ten years, but accruing interest in the long term may offset the immediate savings gained.
- Some loans are attached with adjustable rates. While it might be advantageous to the homeowner at the beginning of the loan, with little to no cost upfront, it can have disastrous consequences when the rate shoots up, leading to an exorbitant amount that is almost impossible if not extremely difficult for the homeowner to pay on a monthly basis. Therefore, it is usually more beneficial to change it into a fixed rate, so you will always know what you are going to pay. It takes out the unpredictability that can be dangerous to those without a financial safety net under them.
- If you have credit card debt, an unexpected large expense to pay, or are just looking to get funds for a project or new purchase, you may be able to take advantage of your home’s value. If you refinance in a value that exceeds what you owe, then you can receive the difference in cash. Some cash out refi’s can net you tens of thousands in an instant, giving you flexibility. However, doing this negates any equity you have built up, and you will need to start almost from scratch to build it back up again.
These are just some of the questions and possibilities of acquiring a home refi. All factors must be taken into account and scrutinized to certify whether or not it is the right path for you to follow. Home refinancing presents many possible options that can help you in the short and long term.