How to Refinance Your Home
A refinance is the process of taking out a new mortgage on your home in order to reduce monthly payments, lower your interest rate, utilize the equity, or change mortgage companies.
For many Americans, a mortgage is probably the largest amount of debt they owe, aside from other loans such as a small business or college loan. Refinancing may be one of the best ways to save some money. It’s not money you’ll see in your pocket overnight, but it will allow you to save in the long term.
Let's say your monthly payment is currently $1,200 at a 6 percent interest rate. Even if you refinance for a rate of just 5.5 percent, that would save you $63 each month, $756 a year, or $7,560 over 10 years.
The average home loan can last 15, 20 or 30 years. If you want to lower your debt and increase your equity, refinancing may be the route to take.
It's common for most people to sign up for a 30-year loan when financing their home the first time around. Every few years, depending on the economy and other factors such as unemployment, rates for mortgages change.
What to be aware of
You should shop around to see if you can take advantage of a better interest rate but it's important to do your research, as rates are constantly fluctuating while the market slowly recovers.
You can switch the type of mortgage you have -- for example you can change from an Adjustable-Rate (ARM) to a Fixed-Rate Mortgage (FRM). An Adjustable-Rate loan has an interest rate that is periodically adjusted based on an index, whereas a Fixed-Rate Mortgage has the same interest rate during the entire life of the loan.
When refinancing, you will most likely have a shorter term loan, which means your monthly payments will be higher, but you will own your home in a shorter amount of time and build your equity faster.
After you receive a lump sum from the refinance, you should use the loan proceeds to pay off the existing mortgage and all costs associated with it, and any money left over are funds for you to use.
Risks and Costs
There are some risks and fees to be aware of when it comes to refinancing.
Some people employ a real estate attorney to help them with the refinancing process. Of course you can choose not to go this route, but the process will still cost you. Lenders charge fees when signing up for a new loan and your old mortgage may have penalty clauses, which means you have to pay when transitioning from your old mortgage to the new loan.
The time that it takes to pay off your loan can create risks. There is more than just a lower interest rate to consider when refinancing. The length of the loan also matters, as it can end up costing the same as your current plan or possibly more. The goal is to take a few years off of the payment plan while receiving a lower interest rate. Refinancing usually costs 3-6 percent of the loan's principle, which is something you should keep in mind.
If you're considering selling your home in the next five years, you may not want to refinance. Moving under five years of refinancing will not be beneficial when it comes to saving money. The costs will most likely not outweigh your current mortgage. Refinancing is typically for someone who knows they are going to be in their house for a very long time.