Explanation of Refinancing a Home
If you are considering refinancing your home and are not quite sure exactly what it entails, you need to familiarize yourself with the terms and definitions involved and the reasons why people refinance a home. One reason for refinancing is to get a lower interest rate. Another reason might be to knock a few years off the life of the loan. Some people refinance and roll other debts into their mortgage to reduce the number of monthly payments.
Other People Are Reading
-
Definition
-
The basic definition of refinancing is that you take your current home mortgage, pay it off completely and get a new mortgage for the same house. The purpose of refinancing is often to lower your monthly mortgage payment by getting a new interest rate. Perhaps rates were high when you first got your mortgage, but are much lower now. Perhaps you got an adjustable rate and you now want to get a fixed rate.
Interest Rates
-
The rule of thumb when thinking about refinancing is to see if you can get an interest rate that is at least two points lower than what you have currently. Refinancing to reduce your interest half a point is simply not worth the time and effort it takes to refinance. If you are considering rolling some of your other debt into your mortgage so that you can have fewer monthly payments, make sure the new rate is worth that as well. For example, if you have a credit card with zero-percent interest, it is best not to roll that over into your mortgage.
-
Fees
-
Many times there are fees associated with refinancing. These fees are often the same types of fees that you paid when your first bought your home. Depending on the type of loan, you may have to pay private mortgage insurance if you do not have 20 percent down, and you may also have to do a buy-down, meaning you pay a certain amount of money to get a lower interest rate.
Equity
-
In order to refinance your mortgage, most lenders require you to have at least 20 percent equity in your home. This means that you cannot owe more than 80 percent of the original loan. The lender will use the 20 percent equity as a down payment of sorts. If you do not have enough equity in your home to add up to 20 percent, you can make extra payments to help you get there faster and allow you to refinance if the rates are still low enough.
-
