Refinance Basics
Having talked about mortgages in our previous article, the natural follow-up is to also discuss the idea of a refinance. Although the term “refinance” seems to be buzzing a lot, it does come with its own costs and fees. Is it something that all the “cool kids” are doing these days? Yes, and no: choosing to refinance will depend on whether or not it makes sense for you. There are three main reasons to consider it:
• To cut costs: “A penny saved is a penny earned,” is every bit as true today as it was in Ben Franklin’s time, but why stop with a few lousy pennies? Think big. Lowering your monthly loan payment by replacing your present mortgage with a new one that offers a lower interest rate could save you tens of thousands of dollars over your new loan’s term.
• To restructure your financing: Sometimes, refinancing makes sense even if the new loan won’t save you one red cent. For instance, suppose you have a short-term loan that’s due soon, and you want to replace it with a long-term loan to give you some more time. Maybe you want to spend less time worrying about your adjustable rate loan and instead keep things simple with a fixed-rate loan. When you restructure your financing, you give yourself the space and time that you need to rest easy at the end of the day.
• To take cash out: If you’ve owned your home a long time, you’ve probably built up quite a bit of equity in it, so the money is sitting there waiting to be used when you sell. However, if it make sense for you, refinancing gives you the flexibility to pull out additional cash now, which you can use to start a new business, help pay for your kid’s college tuition, or finally take that trip that’s still on your bucket list.
If any of the above reasons resonate with you, know that you don’t have to just settle for one reason. With proper planning, it’s possible that you can fulfill even more
The only difference between a purchase loan and a refinance mortgage is whether or not a change of property ownership occurs. When you first purchased your home, ownership of the house transferred from the seller to you. When you refinance your mortgage loan, there is no change in ownership of the property, but it’s possible that your lender is now different. You will undergo the same process for refinancing a mortgage as when you first applied for the mortgage loan for the initial home purchase.
No matter how much of a “hot topic” refinancing becomes, after careful review of your individual situation it may be a better idea to not refinance; there can be advantages to keeping the existing loan and seeking additional sources of funds in a different manner. Remember that all loans start with paying more interest in the beginning of the loan and more principal later in the term. For example: If your loan had only one year left on it (12 payments) with a monthly payment of $1,000, would you start a new 30-year loan (360 payments) with a $65 monthly payment? Doing the math shows you that you wouldn’t be saving money at all; the age of your current loan matters when considering refinancing. However, sometimes the only solution is to refinance, even if the refinancing does not make sense over time; you might really need the new lower monthly payments to survive your current financial situation.
Discovering whether or not refinancing is a good fit for your needs is part of the holistic process of taking your finances under your control; make sure to read our previous articles for further financial literacy, and keep an eye out for our future articles as well!
