Refinancing is a word a lot of homeowners hear but are not exactly sure whether or not it is a good choice for their needs. To put it plainly, refinancing is merely taking a new mortgage (not a second one) to replace the first mortgage on a home. It is done for any number of reasons:
- To get a better interest rate
- To improve the overall terms of the loan
- To obtain funds for improving the property or some other expense
- To convert a variable rate to a fixed rate
- To try to reduce the monthly amount of the mortgage payment
- To help improve their credit score
Of course, the benefits of a refinance only apply if the new loan allows you to reach the goals you have set. In other words, before even pursuing the new loan, find out if one is going to be available to you and for the reasons you’d hoped.
As an example, you might be looking to refinance to get a new car. However, you might find that the property does not have enough equity to yield much of a cashout at the end of the refinancing process. Because of that, you’ll need first to understand how any refinancing is going to work.
How Does Refinancing Work?
To begin with, your home is appraised, and a very realistic valuation is done on the property. Your potential lender is then going to determine the amount or percentage of that value they are comfortable lending to you. After all, you put a down payment on the home and then obtained the balance with your first mortgage. If you are asking now for 100% of that figure, a bank may not be able to hand over the sum.
If you can get what you want, the original mortgage is subtracted from the sum, and any leftover funds are given to you use as you may have desired. Naturally, you might have opted to refinance just to get better terms and not the cash.
Should You Refinance?
Naturally, the question then arises as to whether or not refinancing is for you. That is an excellent question to pose, and one way to look at it is through any potential risks. For example, did the original mortgage have a pre-payment penalty? If so, it might negate the benefits of the refinancing. You must also consider the fees required in the process. Will there be attorney’s fees? Bank fees, and so on? Always have the entire process mapped out for you with the bottom line clearly defined. What will the new interest rate be? What are the new terms? If you are hoping to get cash at the end, how much is actually coming to you? What will the refinancing cost?
You are never locked into a refinance with the existing mortgage holder or bank. Quicken Loans, for example, does refinancing and can help you get the funds you need to improve the home (boosting its value and equity), purchase a vehicle and more. Take the time to figure out if refinancing is for you, and then go with a lender that can offer the best terms.