When Should I Refinance My Home?
Refinancing is a term that most homeowners are familiar with. But sometimes it can be an afterthought. Looking into refinancing is something that’s often put on a to-do list during a surge of motivation. But then the appointment and research nature of that particular project gets procrastinated. It’s understandable! Everybody has a lot going on. And as a homeowner, projects like decorating the guest room or tending the garden are way more fun than something like refinancing.
But refinancing can be a huge money saver. If the time is right, it’s well worth the effort.
How can refinancing help me?
There are a few different reasons why someone would refinance their home.
- If you bought your home with high interest rates, refinancing can be a good way to take advantage of lower rates.
- You can use refinancing to shorten the length of your payment term. So, for example, converting a 30-year mortgage into a 15-year.
- You can also use refinancing to get a low-interest cash loan.
Don’t get thrown off by the vocabulary terms. It’s all pretty easy to understand. There are 2 major different types of refinancing.
Rate and Term Refinancing
In this type of arrangement, you’re readjusting the terms of your mortgage. Put simply, you’re updating the interest rate and/or the time your loan must be paid.
You’re switching your loan from having a 4.9 % interest rate to a 2.3% interest rate.
You’re changing your 30-year mortgage into a 15-year mortgage.
But wait… doesn’t a 15-year mortgage mean a higher monthly payment? Why would I want to do that?
You could potentially transform your 30-year mortgage into a 15… with the same monthly payment. This works if the climate of the economy has shifted and interest rates are much lower (like in 2020’s record-low rates).
This type of refinancing is a good option if you’ve put a lot of equity into your home. It’s a safe way to get a low-interest cash loan.
Here’s an example.
You owe $200,000 on your mortgage
Because of renovations and inflation, Your home is valued at $300,000
Your bank or lender can give you a $100,000 cash-out.
Your mortgage is now $300,000.
This type of refinancing doesn’t always save you money. Whether or not it saves you money depends on your reasoning for taking out a new loan.
There aren’t any stipulations on how your cash-out money can be spent.
So technically, you could take that $75,000 and use it all at the Ho-Chunk Casino.
But you also could pour that money back into your home equity. If you use that money to put in a pool and spa in your backyard…. Well, you’ll likely see that money again when you sell.
A cash-out refinance definitely could mean larger monthly payments or a longer loan term though. So definitely don’t take this decision lightly. Get out the legal pad and make a good old-fashioned pro-con list before jumping in.
What’s the process of refinancing my home?
Step 1: Apply
The refinance application process is not all that different from buying a house. The lender will assess your debts, assets, and credit score. You’ll need to fill out an application that includes your most recent W-2’s, bank statements, and two most recent pay stubs. If you’re married you’ll have to give your spouse’s information too.
If you’re self-employed the process is a little different. You’ll get information directly from your lender or bank. But typically you’ll have to turn in the past 2 years’ tax returns.
Step 2: Lock In That Interest Rate
The housing market can change… fast. Sometimes faster than the refinancing approval process. If you choose to lock in your interest rate, you’ll keep that rate secure for 15-60 days. That’ll protect your rate while going through the approval process.
The decision to lock in your rate takes a little research. It’s a gamble, sort of kin to betting on the stock market. Analyze the trends of the past few months. If the interest rate seems to be consistently trending downward… it may be better to wait. Even lower rates may be coming soon.
But if you’re not a risk-taker, this is a good general rule of thumb:
If you’re happy with the interest rate… lock it down.
Here’s another vocab term for you… if you choose not to lock in your interest rate it’s called floating the rate. So if you’re asked “do you want to lock or float your rate?” that’s all it means.
Step 3: Appraisal
Your lender will order an appraisal and an appraiser will come out to your property to assess its value. You’ll want to make sure your home is clean and tidy. The yard is mowed. Overall, have your home looking its best when the appraiser comes knocking. It’s advisable to put together a list of improvements you’ve made to the home since buying it. Give a copy to the appraiser when he/she arrives, and then keep another copy for your records.
If the appraiser decides that your home loan is greater or equal to the refinancing you’re requesting you’re a shoo-in.
Step 4: Closing On Your Loan
Your lender will send you a loan disclosure a few days before you close. In this document, you can review all your final numbers.
Closing moves a bit quicker than closing on your house. The lender will be there, and so will anyone whose name is on the refinance application. In this meeting, you’ll go over the terms and sign on the dotted lines. If you opted for a cash-out refinance you’ll get your funds at this meeting.
Who is the best lender in Madison to help me with a refi?
If you’re happy with the mortgage officer who helped you buy your house, that’s a great and comfortable option for your refi. But if you’re interested in switching it up, just reach out. We know several amazing lenders in the Madison area. We’d be happy to give a recommendation.