Purchasing a home is a significant financial commitment with a small margin for errors. If you have already purchased a home but now want a different mortgage rate, a different lender or even new terms, mortgage refinancing may be right for you. However, a refinance can come with important changes and issues that you may not expect. Here’s a look at what you need to know about refinancing a home to help you prepare for the process.
What Is Home Refinancing?
Most homes are purchased with the assistance of a loan from a bank which is called a mortgage. Home refinancing is the process of replacing the current loan/mortgage on your home for a new one.
Why to Refinance a Home
Homeowners refinance their mortgages for a variety of reasons. Most commonly, it is done to secure better term opportunities. When you take out the new mortgage, you have a chance to re-select multiple elements of that loan, such as the term, interest rate and mortgage insurance.
In the past, when interest rates dropped, many homeowners refinanced from a 4% interest loan to a 2.75% interest loan. Others who are interested in paying off a home more quickly will refinance to change the term from 30 years to 15 years. While this option increases the monthly payment, it significantly decreases the amount of interest paid over the life of the loan.
Some homeowners may refinance to change the type of interest rate that is applied to the loan. In order to qualify for a higher amount of a mortgage, some purchasers will take a mortgage with an adjustable rate. Over time, as the rate adjusts according to the agreed upon schedule, their interest rate may continue to increase. By refinancing to a fixed rate mortgage, they know exactly what their interest rate will be going forward.
It is also possible to refinance an existing mortgage to get cash backed by equity in the home for important projects or obligations. This is called a cash-out refinance because you will receive cash from the lender after your refinance application goes through.
An example would be if your home is worth $250,000 and you have a balance of $100,000 left on your mortgage, you could refinance a $150,000 mortgage. Of that, $100,000 pays off the first mortgage. The remaining $50,000 is cashed out to you.
You will now have a mortgage of $150,000 versus the previous $100,000. However, you now have $50,000 in cash to fund your project or other obligations. Many people use this option to pay for major home renovations or repairs.
Things to Note When Refinancing
Refinancing can be a powerful tool, but it is important to be aware that some things will change. You need to be prepared for additional expenses when refinancing. These include:
Refinancing closing costs – Similar to the closing costs on your first mortgage, you will need to pay them again when you create another mortgage.
Lenders are not guaranteed – Many people refinance to work with a specific lender or bank. However, buyers have no control over whether their mortgage is sold to another lender. This has become a standard in the mortgage industry.
Title insurance comes again – Lenders require that buyers pay for a lender’s title insurance policy when taking a mortgage. Although you likely paid for this on the first mortgage, it is purchased again for the new mortgage. However, if you also purchased a title insurance policy for yourself (an owner’s policy), you will not need to pay for that again. An owner’s policy stays with you for as long as you own the property.
If you missed the opportunity to acquire title insurance the first time that you took a mortgage loan, the next best time is now, when you are in the process of refinancing. Title insurance can shield you from critical threats, including liens on the property and claims from previously unknown heirs who may take the home from you.
Trust the Pros to Help You Protect Your Investment
If you are considering refinancing your home, it is important to understand how the process works and how it affects your existing policies, including title insurance. The experts at Mathis Title Company can help you navigate the refinancing process and maintain your title insurance or purchase a new policy to protect your home in the future. Contact Mathis Title Company to learn more or to schedule an appointment to get started.