When you refinance a home loan, it means you take out a
new loan and use the proceeds from that new loan to "close
out" an existing home loan. The reason a homeowner would
refinance is that oftentimes, the new home loan will have
a better interest rate than the current home loan. This
lowers the monthly payments allowing you to pay off your
loan sooner by lowering the payments each and every month.
Before you decide on whether to refinance your home loan
or not, you must consider four key factors:
- the current interest rate on your existing home loan,
- the market rates for different refinancing loans,
- how many years you plan to stay at your existing
residence, and
- your current needs for cash (i.e. whether you would
like to take additional cash from the refinance).
If you are going to take additional cash from the equity
of your home when you refinance, you can use this cash for
buying a new car, home improvements, wiping out credit card
balances, or more. You can even use this added cash for
investing in stocks, bonds, or mutual funds.
The good thing about refinance applications is that they
are processed fairly quickly, especially if you apply for a
refinance loan over the Internet. If the loan originator
needs some more information from you, they will request it
via email or telephone. Most likely, you will be able to
use much of the same documentation you used to secure your
existing home loan for the refinance. Some additional info
required might be proof of consistent payments on your
existing home loan, and information on the reasons you are
refinancing (i.e. to lower payments or get cash). Be
careful - you will incur many of the same charges you paid
when you secured your initial home loan - appraisal fees,
lender fees, title insurance, etc. But, if the terms are
good, it will be worth it to refinance and pay these same
expenses again because you will save so much money in the
long term.
In many instances, refinancing a home loan is a great way
to lower your monthly mortgage payment due to a lower
interest reate. And this is the most common reason that
people refinance - to lower their payments. A good litmus
test for any refinancing consideration is to see if the new
interest rate is two points lower than your existing rate.
Generally, this will lower your monthly payments as long
as you don't take any cash out and increase the principal.
All in all, refinancing can save you money and increase
your current assets. So talk to your financial advisor or
banker today!
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