What Is Refinancing Your House?
The decision to refinance a house is almost as big as the decision to obtain a mortgage and buy a house. This is mostly because the refinancing process is almost identical to obtaining original financing. Homeowners' experiences will vary, and different lenders may have different ways of defining marketing terminology, such as "no-cost" refinancing. Does this Spark an idea?
-
Definition
-
Refinancing a house entails paying off an existing mortgage loan in full, then taking out a new loan on that house. The process is very similar to taking out an initial mortgage. Refinancing does not have to be done through the same bank that issued the original mortgage. However, it can be if the homeowner decides that is her best option. If a homeowner decides that she would like to switch from an adjustable rate mortgage (ARM) to a fixed-rate mortgage, or that she simply wants to cash out the equity in her home for other uses, it is also considered refinancing.
Requirements
-
Requirements for refinancing a house are the same as they were for obtaining the original mortgage loan. The homeowner must pay various fees, which will differ based on the lender. These fees can be as much as 3 to 6 percent of the total value of the remaining principal on a loan. Lenders for the new mortgage will take a homeowner's credit report and credit score into consideration, as well as any other personal financial information.
-
Benefits
-
Lower interest rates are the primary reason to refinance a house. If a homeowner's credit rating has improved significantly, he may be eligible for a lower interest rate. This, in turn, lowers the monthly payments on his house. While the amount by which the payments decrease may seem small, it adds up. Even a payment reduced by only $50 a month adds up to a savings of $600 a year. If a homeowner chooses to pay that extra $50 per month toward the principal of his home, the loan will be paid off sooner. The amount of interest paid over the life of the loan will drop considerably, as well.
Considerations
-
In addition to loan origination fees and application fees, a homeowner wishing to refinance will have to again pay many of the same fees he paid when obtaining his first mortgage. This includes the cost of a home inspection and appraisal. If a home inspection turns up critical structural or safety issues within the home (wiring problems, cracked foundations, moldy basements or crawlspaces or other serious problems), a lender may stipulate that these issues must be addressed before a new loan can be issued. If a house appraisal determines that the value of a house has changed significantly since the original loan was issued, it may impact the terms of refinancing as well.
Warning
-
Homeowners should do thorough calculations to determine whether or not the fees and time involved will be worth the savings they will obtain by refinancing their houses. If a homeowner has been paying the same mortgage for a long time, refinancing will mean that less money per month is being put toward the owner's equity in the house. A homeowner's current mortgage may also have a prepayment penalty that should be considered. Also, if a homeowner plans to sell the house soon after refinancing, it may not be worth it.
-
References
- Photo Credit home sweet home image by David Dorner from Fotolia.com
