What is a Refinance?
When you refinance, you pay off your existing mortgage and create a new one. You may even decide to combine both a primary mortgage and a second mortgage into a new loan with a refinance. Refinancing may remind you of what you went through in obtaining your original mortgage, since you may encounter many of the same procedures–and the same types of costs–the second time around. Dan O’Brien with Dan O'Brien | Emerald Mortgage Partners is happy to help his clients with a home purchase or refinance in Lake Mary, Orlando, Winter Park, Sanford, as well as the whole state of Florida. For more information on how a mortgage refinance can benefit you, contact Dan today at (407) 392-1904 or click here to use my FREE Refinance Advisor.
Questions to ask yourself when considering a Refinance
Have interest rates fallen? Or do you expect them to go up? Has your credit score improved enough so that you might be eligible for a lower-rate refinance mortgage? Would you like to switch into a different type of mortgage?
Why consider a refinance?
Lowering your interest rate
The interest rate on your mortgage is tied directly to how much you pay on your mortgage each month–lower rates usually mean lower payments. You may be able to get a lower rate with a refinance because of changes in the market conditions or because your credit score has improved. A lower interest rate also may allow you to build equity in your home more quickly.
Adjusting the length of your mortgage
Increase the term of your mortgage: You may want a refinance mortgage with a longer term to reduce the amount that you pay each month. However, this will also increase the length of time you will make mortgage payments and the total amount that you end up paying toward interest.
Decrease the term of your mortgage: Shorter-term mortgages–for example, a 15-year mortgage instead of a 30-year mortgage–generally have lower interest rates. Plus, you pay off your loan sooner, further reducing your total interest costs. The trade-off is that your monthly payments usually are higher because you are paying more of the principal each month.
Changing from an adjustable-rate mortgage to a fixed-rate mortgage
If you have an adjustable-rate mortgage, or ARM, your monthly payments will change as the interest rate changes. With this kind of mortgage, your payments could increase or decrease.
You may find yourself uncomfortable with the prospect that your mortgage payments could go up. In this case, you may want to consider switching to a fixed-rate mortgage to give yourself some peace of mind by having a steady interest rate and monthly payment. You also might prefer a fixed-rate mortgage if you think interest rates will be increasing in the future.
Getting cash out from the equity built up in your home
Home equity is the dollar-value difference between the balance you owe on your mortgage and the value of your property. When you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment (this is called a cash-out refinancing). You might choose to do this, for example, if you need cash to make home improvements or pay for a child’s education.
Remember, though, that when you take out equity, you own less of your home. It will take time to build your equity back up. This means that if you need to sell your home, you will not put as much money in your pocket after the sale.
If you are considering a cash-out refinancing, think about other alternatives as well. You could shop for a home equity loan or home equity line of credit instead. Compare a home equity loan with a cash-out refinancing to see which is a better deal for you.
Are you eligible to refinance?
Determining your eligibility for refinancing is similar to the approval process that you went through with your first mortgage. Your lender will consider your income and assets, credit score, other debts, the current value of the property, and the amount you want to borrow. If your credit score has improved, you may be able to get a loan at a lower rate. On the other hand, if your credit score is lower now than when you got your current mortgage, you may have to pay a higher interest rate on a new loan.
Lenders will look at the amount of the loan you request and the value of your home, determined from an appraisal. If the loan-to-value (LTV) ratio does not fall within their lending guidelines, they may not be willing to make a loan, or may offer you a loan with less-favorable terms than you already have.
If housing prices fall, your home may not be worth as much as you owe on the mortgage. Even if home prices stay the same, if you have a loan that includes negative amortization (when your monthly payment is less than the interest you owe, the unpaid interest is added to the amount you owe), you may owe more on your mortgage than you originally borrowed. If this is the case, it could be difficult for you to refinance.
What will a refinance cost?
It is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees. These expenses are in addition to any prepayment penalties or other costs for paying off any mortgages you might have. Refinancing fees vary from state to state and lender to lender. Here are some typical fees and average cost ranges you are most likely to pay when refinancing. Dan O’Brien with Dan O'Brien | Emerald Mortgage Partners is happy to help his clients with a home purchase or refinance in Lake Mary, Orlando, Winter Park, Sanford, as well as the whole state of Florida. For more information on how a mortgage refinance can benefit you, contact Dan today at (407) 392-1904 or click here to use my FREE Refinance Advisor.