If you’re worried about how much your home loan costs, consider refinancing. Interest rates are low right now—if you can find a way to lower your rate, you’ll end up paying less over the loan’s lifespan.
However, there’s no one-size-fits-all approach to refinancing, so it’s important that you understand what the process entails and whether it makes sense for your situation.
Here are six things everyone should know before jumping into this type of home loan transaction:
1. Refinancing Could Get You Some Cash
Refinancing your mortgage can be a great way to save money. The most obvious benefit is that you’ll get rid of the higher interest rate on your current loan and secure lower payments for years to come. You might also be able to use this opportunity to pay off other debts, such as student loans or motorcycle loans, with the cash from your refinance.
This can even be better if you’re a veteran who qualifies for the jumbo Veteran Affairs( VA) loan, such as the one offered by Security America Mortgage. A loan is considered jumbo is it exceeds the normal loan limits and this is what VA loans were legislated to do!
2. You’ll Pay Closing Costs
Closing costs are the fees associated with refinancing a mortgage. They include an appraisal fee, credit report fee, and title insurance premium. In some cases, homeowners pay a settlement service fee to the lender or escrow company that handles their closing.
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These closing costs can add up to thousands of dollars, which is why it’s important to check your lender’s rates along with their closing costs. Some lenders offer better rates than others, but charge higher closing costs; others may have lower rates, but less expensive closing costs.
3. Consider An Adjustable-Rate Mortgage
If you’re looking to refinance your mortgage, consider a fixed-rate mortgage or an adjustable-rate mortgage.
A fixed-rate mortgage has a set interest rate that doesn’t change for the life of the loan. With this option, you’ll know exactly what your monthly payments will be and how much principal you’ll pay over the life of the loan. However, such loans tend to have lower initial rates than adjustable-rate mortgages do, and they can come with hefty prepayment penalties if you choose to pay off your balance early.
And, what exactly is an adjustable-rate mortgage? As its name suggests, an ARM allows borrowers to choose their own payment amount each month (based on prevailing interest rates). The benefit here is that if market conditions improve after closing on your new home (or business), then it may be possible for them to save money by refinancing with another type of financing later on down the line.
However, there are also potential pitfalls associated with this choice. If rates go up while they’re paying off their loan balance in full (which happens often enough), then borrowers may end up paying more than they had originally bargained for when signing on those dotted lines back when things were cheap by comparison! For example, some homeowners who took out ARMs during periods such as 2008 saw their monthly payments increase dramatically due largely due to high inflationary pressures caused by high fuel prices.
4. It’s A Good Idea To Have Equity In Your Home Before Refinancing
You’ll probably be required to have at least 20% equity in your home before refinancing. Equity is the difference between the value of your home and what you owe to it. You can get a home equity loan or refinance your mortgage to use this equity to pay off your mortgage, make repairs, remodel, or buy another property. If you don’t have enough equity in your home to repay such loans, they’ll become junior liens on your property, which means they’re ranked below other liens, like first and second mortgages (if applicable).
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5. It Can Shorten The Life Of Your Mortgage
Refinancing your mortgage can shorten the life of your loan, but it’s not necessarily a bad thing.
If you refinance to get a lower interest rate, you’ll pay less in interest over time and save money on your mortgage. If you refinance to make your monthly payment more affordable, then you’ll have more cash in your pocket each month.
6. Interest Rates Are Low
Interest rates are low. Like anything else in real estate, interest rates can be volatile—they rise and fall based on a variety of factors, including market conditions, economic conditions, and even politics. Interest rate trends are important to watch because they can impact the value of your home when you sell it later on down the line.
A low-interest rate has its advantages for both buyers and sellers. The lower cost allows more people to buy homes, which increases demand for housing units overall. At the same time, it makes it easier for homeowners to refinance their current homes if they’re underwater on their mortgages or need a smaller mortgage payment, so they won’t be overwhelmed by monthly expenses.
If you decide to refinance, be sure to do your research and understand the process. The more information you have, the better off you’ll be.