Your home is probably one of the biggest purchases you’ve ever made. If a few years have passed since you’ve done so, then the chances are that your circumstances may have changed a bit. Refinancing might be something you want to investigate.
Understanding Refinancing And It’s Benefits
When you refinance a loan, you are restructuring the loan you already have. This can be done in one of two ways. You can investigate a Rate/Term Loan that will alter the rate, shorten, or lengthen the term. Or both. The other option would be a Cash-out or Equity Loan. This type of refinancing will allow you to use some of your home equity to give you access to cash. Ultimately, it will come down to what you want the loan to do for you. Your financial goals will help you decipher what type of loan is best for you.
Taking a deeper dive into understanding these loan structures will help you have a more educated conversation with your loan officer.
When is a Rate/Term loan the best option?
Your loan officer will be your best resource when making this decision as they are looking at the whole picture. However, consider the following:
- Do you think your interest rate is higher than the current market?
- Have you added income that could help you pay your mortgage more aggressively?
- Do you already pay extra on your mortgage payment?
- Have you made any large sum payments on your current mortgage?
- Have you been in your current mortgage long enough that a new amortization calculation could provide you with additional savings?
- Do you have minimal debts outside of your mortgage?
These questions are going to give you a good place to start. Answering these questions, your loan officer and you can determine if the new loan’s function will accomplish your financial goals. If you want to take it a step further, you can ask your loan officer for a Total of Payments (TOP) calculation to be completed comparing your current loan to the new loan options that they are offering. This will show where the savings are.
What can I do with a Cash-out loan?
Believe it or not, many people don’t know that you can use some of your home equity to accomplish some of your other goals. By leveraging the equity, you can borrow some of the cheapest money available to you.
It is important to note that the word equity does not hold a numeric value. It also doesn’t have a true value in the walls of your home until it’s needed. (Clear as mud?) Let me explain. Typically, an appraisal is completed on the home to give it a value. Depending on which loan product you are choosing, it will dictate your max loan-to-value that is allowed. Ultimately, this is going to tell you how much cash you have access to.
Equity can be used for many things, but the most common goals are debt consolidation, home improvements, and investments. You will want to be open with your loan officer about your goals as it will help them tailor the loan to your specific needs.
If you have any high-interest loans or credit cards with high balances that are stretching your budget, this might be an option for you. This is especially powerful if you can only make the minimum payments on your current credit card bills. You might find more flexibility in your monthly payments by lowering the interest on the debt or moving it from compound interest to simple interest. If the budget isn’t tight, but you still feel like you are paying too much, you might even look at shortening your term with the same monthly output. This will provide you with additional savings over the life of your loan.
When it comes to owning a home, there always seems to be a laundry list of changes or upgrades you want to make. Some of these items come with a high price tag when you start thinking about a new roof, kitchen cabinets, bathrooms, flooring, or even an addition. In this particular case, many of these renovations are going to add value to your home. Why not use the equity to foot the bill? The money in your walls isn’t doing anything for you at the moment.
Start pricing some of these items out. Decide if you will hire someone to complete the work or if you are going to complete it yourself. Once you’ve done this, you’ll have a much easier conversation with your loan officer as to if the new loan will help you accomplish the work. The biggest thing to remember is to ask if you are going to have to get an appraisal. If you do, you probably don’t want to start any big projects before you close. Some loan types require that projects be completed before closing. That could put your loan at risk.
Investments can mean different things to different people. It’s not as cut and dry as you think. Some people will pull cash out of their homes to invest in their businesses. Some may want access to cash to purchase another property, such as a vacation home or a rental property. Some may want a lump sum to pay for a wedding, buy cars for their children, or pay off a settlement. The possibilities are pretty much endless. However, you will want to be clear with your intentions.
There are so many things you can do with a refinance. Having a conversation with your loan officer about your options is the first step.