Buying a home is done for two reasons. First, the residence. It’s a place to live and build a life. It’s a place to put some roots down. Second, real estate is an investments. The home is no different. it’s not like a car that depreciates in value the minute you drive it off the lot. Over time the value of the home typically increases, especially as you pay down the mortgage. You’ll watch the equity build slowly but surely. It’s a low risk investment with opportunity for a good return. Now, oftentimes you get into a home and find later that you want a refinance. There are times to do this and there are times to avoid this, but here are a few of the scenarios where you may want to refinance a home.
Refinance a Home to Better the Terms
When you refinance you should have an end goal in mind of seeing an improvement in your financial situation. This can come through money saved, it can come through adjusted mortgage payments that free up a bit of your cash, or it can even come from the equity. Regardless of where it comes from, just make sure that what you’re doing is going to offer you a financial benefit.
The first item most homeowners look at when they want to refinance a home is the interest rate. This is the best place to start. Interest rates constantly fluctuate, and if you are able to secure a low rate, you can save thousands of dollars over the life of the loan. So many homeowners refinance when the interest rates hit a low point, or even when their credit has improved enough to qualify for a lower rate. The benefits of the lower rate won’t pay off immediately, but over time you can save a decent amount of money.
The second reason to refinance a home is to adjust the terms of the mortgage. Many homeowners take on an ARM loan and they get loan terms that are typically 30 years. Eventually that ARM loan begins to adjust and then the mortgage payment changes. ARMs are cheaper initially but over a thirty year span they are very unpredictable. It’s a good idea to switched into a fixed mortgage so you know you won’t end up with a ridiculously high interest rate because of the fluctuating market. While adjusting the loan type, it’s not uncommon to adjust the loan term as well. If you are able to make the payment switching from a thirty year to a twenty or fifteen can have a major financial impact. Before you make any switch, however, it’s recommended that you do your calculations in a refinance calculator to determine whether or not you will actually save money.
Another good reason to refinance a house is to take out the equity and use the cash for other investments. Investments are the key here. if you take your equity and spend it on a new car and a vacation, you’ve essentially taken out more debt to pay for things that will depreciate in value. But if you take out the equity and invest it in some smart investments, you expand your investment portfolio and the money works for you. This is not a bad idea if you need money for a solid investment.
Fees and Costs of a Refinance
There are a couple of items that every homeowner needs to be aware of prior to refinancing. First, there are fees involved. Lots and lots of them. With these required payments and the closing costs, you will more than likely be into the refinance a couple of thousand dollars right up front. Oftentimes it’s more. So before you refinance make sure that it is really going to benefit you financially, because it will be a few months or a couple of years before you break even on the initial investment. A second thing you need to be aware of is the amortization schedule. If you’ve been in the same mortgage for a long time, refinancing into a new mortgage is going to start your amortization schedule over. This pattern can keep you essentially paying interest for life; no homeowner wants to do this. So use the refinance calculator to your advantage and make sure you will get the benefits you need before you lock yourself in on a new loan.
It’s also wise to get a good loan officer to help you in your refinance. You’ll need the professionals who know how to navigate the waters of the real estate world. Just make sure you clearly state what you want and need so they can help you get the deal you’re looking for.