Refinancing

Refinancing can be used to achieve different goals. If a home is currently financed at a high interest rate, a new loan at a lower rate can save a surprising sum over the life a loan. If a large amount of equity has accumulated in the home, refinancing provides a homeowner with a way to access cash without having to sell.

Calculating Equity

Subtracting what is owed on a Home from what that home might sell for gives you the equity or accumulated net worth of your home as an asset. To be more accurate the cost of selling (commissions, title insurance, and closing costs) should also be subtracted.

Refinancing Costs

Like any mortgage loan, there are costs involved. These costs can reduce the amount of cash pulled out. If the homeowner is not taking out equity, but only reducing the payment, these costs must be offset against those savings. For example- if a refinancing costs $1,000 and results in a $100 monthly saving, it will take 10 months before the new savings is realized.

Taking Money Out – Cashing In

A cash out refinancing can allow a homeowner to access the accumulated equity in their home without having to sell. There are costs associated with this such as loan fees, title resources, and a lender appraisal. Interest rates can sometimes be higher for a cash out refinance versus a traditional refinance. Lenders also will usually cap the amount a homeowner can borrow at 75-80% LTV (loan-to-value).

Reduction of Term

A fifteen year mortgage pays off in half the time but it is often unavailable at the time of an original purchase due to size of down payment required or income considerations. However, some homeowners look at refinancing their 30 year loan into a 15 year loan after a few years of appreciation or upward mobility in their career or income.

Payment Reduction – Interest Rate

Interest rates are a constantly changing world, and as they fluctuate they can provide opportunity for homeowners to loan their monthly payment by refinancing their home at a lower rate than they currently have.

There are costs and qualifications to consider so homeowners need to weigh the savings against the cost.

Removing mortgage insurance is another reason homeowners refinance. If you purchased your home with less than 20% down, chances are you have mortgage insurance. If your home’s value has increased to put you in a 20% equity position, it may be possible to remove your mortgage insurance.

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