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Home refinancing is when you pay off an existing loan and renegotiate a replacement. Homeowners refinance for numerous reasons: to take advantage of a lower interest rate; to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage; to shorten or lengthen the loan term; or to tap into home equity.
Homeowners often access the equity in their homes to cover major expenses, such as the costs of home renovations, a child’s college tuition or to consolidate debt.
Refinancing is a great way to leverage your equity. Before you take the plunge, you must understand the refinancing options available to you and the pro’s and con’s for each. At DLC First Pacific Mortgage, we will walk you through every step of the process. Our mortgage specialists will provide you with a detailed report to help you make the best decision for your unique situation.
If interest rates have fallen since you got your mortgage, by refinancing you could take advantage of reduced monthly payments and lower interest rates. For example, if you took out a 25 year fixed rate mortgage of $300,000 at 5% interest and the lender’s rate is now 3%, refinancing could save you over $300 in monthly payments.
If you plan to stay in your home, refinancing may be the best option for long-term savings. However, there are a few things to consider. At DLC First Pacific Mortgage, we will look at the numbers and work with you to determine the best option.
If you want to convert your adjustable-rate mortgage (ARM) into a fixed-rate loan, it may be a good time to refinance.
An adjustable-rate mortgage is a loan that often starts off with a low-interest rate and resets periodically over the life of the loan. Typically, ARM’s have an introductory period where the interest rate remains fixed, followed by a period during which the lender may adjust the interest rate. Usually adjustments occur every few months or yearly, however, rates could be adjusted monthly depending on the lender. This type of financing could lead to significant increases or decreases in monthly payments.
Therefore, before the reset date borrowers frequently convert to a fixed-rate loan, as it’s usually the safest bet if you intend to stay put for a long time.
When calculating your mortgage interest rate your credit rating is a significant factor. Lenders consider your borrowing and repayment history to help determine your ability to repay the loan. A lower score can lead to a higher-than-average interest rate. Over time, if you’ve taken steps to improve your credit score you could be eligible for a much better interest rate.
Another way for homeowners to reduce their monthly payment is by extending the loan term. Let’s say you took out a 25-year mortgage for $250,000. After 10 years of paying down on the loan, the balance is now $175,000. On one hand, by taking out a new 25-year loan for the remainder, your monthly payment will be reduced. On the other hand, lengthening your loan term means adding 10 more years to your mortgage. If you’re struggling to keep up with your monthly payments this might be a feasible solution. However, beware that extending the loan term will cost you more in interest.
One of the benefits of home ownership is the chance to consistently build equity. Over time you can let the equity in your home work for you. Refinancing with a larger loan allows you to access extra cash when you need it. That money could help you cope with life’s major expenses, like, paying off debt, investment opportunities, home renovations or your children’s education.
In order to do cash-out refinance there are some limitations. To qualify, you must have a good loan-to-value ratio (LTV) as determined by the lender. The LTV ratio is calculated by dividing the loan amount by the appraised property value.
So, for instance, your property is valued at $500,000 and you currently owe $320,000 on your mortgage. If the lender has an 80% LTV, you could get a new $400,000 loan and withdraw up to $80,000 in cash.
There are several ways to access the equity in your home. A home-equity line of credit (HELOC) or home equity loan uses your home as collateral and typically offer lower interest rates than credit cards.
There are some drawbacks to this option. In order to get the new loan you will have to pay closing costs and when you do sell your home down the line you’ll have less equity to play with. But if you’ve used the funds to make improvements that will increase the value of your home, it may be worthwhile.
At DLC First Pacific Mortgage, we will help find the solution that is best for you.
Before you decide that refinancing is the right choice for you, be sure to factor in all the associated fees and penalties. Whether it’s the prospect of lowering your interest rate or accessing equity from your home, the cost to refinance your mortgage depends on the strategy you use. In any event, you will always incur legal fees, appraisal charges and other potential costs.
While seeking refinance options, it’s best to compare the good faith estimates of a diverse group of lenders. These documents should include a breakdown of the projected costs and the interest rate.
You may encounter lenders offering loans with no closing costs, but don’t be tempted by the apparent savings. The lender will charge you a higher interest rate to account for those expenses. If you intend to stay in your home for a good amount of time, it may be in your best interest to pay those fees upfront and lower your monthly payments.
If you’re not committed to keeping your home for the long haul, paying those expenses in advance may not be as appealing. Figuring out your break-even point may make that decision easier. To calculate the number of months it will take to break even on your new loan, divide the closing costs by the difference you save with your new interest rate.
Shopping for home loans can be a tedious and complicated affair. Like any other major purchase, you will want to shop around for the best deal. It’s a good idea to meet with a variety of different lenders, because rates and fees will vary depending on the provider’s lending criteria.
If you’re concerned about lowering your credit score by pulling multiple credit reports, don’t be. With access to over 230 lenders, we can minimize the impact on your score by contacting an array of lenders with one application, at no cost to you!
Dealing with multiple lenders can be time consuming and overwhelming. To secure the most attractive terms and save time, the mortgage professionals at DLC First Pacific Mortgage will do the work for you!