What is home refinancing and when should I refinance?

Refinancing is the process of paying off an existing loan by taking a new loan and using the same property as security. Homeowners may refinance to reduce their mortgage expense (payment amount) if interest rates have dropped, to switch from an adjustable to a fixed rate loan if rates are rising, or to draw on the equity and take out cash for large purchases or repairs. Most people refinance when they have equity in their home, which is the difference between the amount owed and the worth of the home which may be impacted by rising home prices.

Common reasons to refinance:

  • One of the primary advantages of refinancing regardless of equity is to reduce your interest rate. Often, over time as people promote within their careers they make more money and are able to pay all their bills on time promoting an increased credit score. With an increased credit comes the ability to secure loans at lower rates, therefore many people refinance for lowered interest rates. A lower interest rate can profoundly impact your monthly payments, by lowering your payment and saving hundreds of dollars a year.
  • Second, many people refinance for cash out to obtain money for large purchases (car, boat), make home remodels/repairs or pay down other high interest debt. This is done by refinancing for the purpose of taking equity out of the home. A home equity line of credit is calculated as follows. First, the home is appraised. Second, the lender determines how much of a percentage of that appraisal they are willing to loan. Finally, the balance owed on the original mortgage is subtracted. After that money is used to pay off the original mortgage, the remaining balance is determined to be the equity and loaned to you the homeowner. Many things impact the value of you home over time such as improvements you’ve made since buying it or simply time where over a period of time home prices have increased raising the value of your home.




How do I refinance?

The first thing you you want to do is consider how you plan to repay the loan. If you plan to use the line of credit to complete renovations/repairs to increase the value of your house, you would consider the increased revenue during the sale of the house to be the way you repay the loan. If you are refinancing and using the credit or the purchase of a car, education or paying down high interest debt, its best to identify your plan to repay the loan.

Most importantly you will need to contact your mortgage lender and discuss the options available to you. Its standard that lenders require borrowers to have been in their mortgage for at least 12 months prior to refinancing.

Refinance today and lock in on low fixed mortgage rates.