Once you sign a deed of trust agreement (commonly referred to as a mortgage) and move into your home, your interest rate does not have to stay the same forever. When mortgage rates drop, you can go through the refinancing process, which gives you a new mortgage that you can use to pay off the existing loan. The terms of refinancing loans typically favor homeowners, allowing them to reduce monthly payments and save money. Before submitting a refinance application, consider your reasons for doing so and take a look at the pros and cons of making such a decision, below.
Benefits of Refinancing
Most homeowners choose to refinance because they can obtain a lower interest rate. This helps them save money, preserve their credit and maintain control of their finances as refinance loans can lower both the interest rate on a mortgage and monthly mortgage payments. Even a drop of one percentage point of interest can save homeowners money, representing significant savings over a 30 year period.
Refinancing can also convert an adjustable rate mortgage (ARM) into a fixed rate mortgage. ARMs generally offer lower, fixed rates for either one year, 10 years, or somewhere in between, depending on the terms of the loan. However, these rates can increase as soon as the fixed term is up. An ARM may work well for homeowners who intend to live in their homes for a shorter period of time, but a fixed rate mortgage may work if you change your mind and decide to stay in your home for a few extra years.
If you find yourself needing to cash out your equity, a refinancing loan can help. Equity, or the difference between the value of your home and the amount you owe a mortgage lender, is typically acquired by selling the house. If you’re not planning to sell, you can instead borrow against the equity and refinance for more than your house’s current principal balance. Be aware that cashing out equity will increase your debt and mortgage payment, and make a plan to ensure timely mortgage payments after the increase to avoid losing your home or defaulting on payments.
Drawbacks to Consider
Refinancing isn’t always the right choice for all homeowners. You will need to apply for a new mortgage as part of the refinancing process, and if your credit or income have decreased since applying for the original loan, you may find yourself at a disadvantage. Having an existing mortgage does not guarantee approval for a refinance loan, and lenders will scrutinize your tax returns and pay-stubs to ensure that you have a credible credit history and enough income to take on an additional loan.
While refinancing can save you money in the long run, it is important to account for the upfront costs involved, which surprise many homeowners and leave them scrambling for extra funds. Closing costs are typically between 3% and 6% of the loan balance, and fees include payments for a home appraisal, application, title search, credit report, and loan origination. Mortgage-related fees are generally paid-for at closing, but some lenders include them in the loan balance. If you’re refinancing an FHA loan, you will also need to pay for mortgage insurance, so make sure you fully understand the terms of your loan and the fees you will be responsible for paying before closing.
Finally, be aware of lowball appraisals. A good appraiser will use recent comparable sales in your area to assess the home’s value and provide a fair number. A lower appraisal than is merited can completely halt the refinancing process if an appraiser decides the home is worth less than what’s currently owed. In areas where appraisers must take foreclosed properties into consideration during the comparison process, homeowners may want to postpone their refinancing application until they build additional equity or housing values recover.
Working With a Title Company
Speak to Mathis Title Company for more information about refinancing your home or to schedule a free consultation. Robin Mathis has extensive experience in both the legal and real estate industries, allowing her to provide her clients with expert guidance that gets them positive results. Mathis can also assist with mechanics liens, mortgage negotiations, and title searches, making her company a convenient, one stop shop for all your home financing needs.
As we’ve seen, refinancing could help some homeowners save money, obtain more favorable loan terms, and even receive an influx of cash after taking out equity. Refinancing is one of the best ways to lock in lower rates and reduce your mortgage payments, allowing you to save up for bigger purchases or investments. If you’re current on your payments, have a good credit score and cash for closing expenses, and are able to verify your income, contact Robin Mathis today to discuss how a refinancing loan can help you achieve your financial goals!