What to Consider Before Refinancing

NEW YORK — The notion of refinancing is often misunderstood by homeowners, or at least not fully understood. The definition partially describes what refinancing is all about – it's a re-finance of an existing mortgage. In other words, the present mortgage is replaced with a new mortgage, negotiated with different terms and conditions. Homeowners typically refinance to make their mortgages more affordable, from month to month. The goal is routinely a lower interest rate or a different loan duration.

For example, a homeowner with a 30-year mortgage at 6.5% interest may find it beneficial to refinance into a new 30-year mortgage at 5%. Granted, there are fees, commissions and other considerations when applying for refinancing. Some people may qualify for a mortgage when they are financially in good standing. But they may wish to refinance after they lose their job, or their fortunes take a turn for the worse. Qualifying for a refinance may then present a challenge. That's why it's important to carefully assess the situation for an accurate understanding.

When done correctly, refinancing can assist homeowners in saving money on their monthly payments. It can also help with existing cash from their home equity. Recall that home equity represents a homeowner's stake in the property based on the market price and what is owing on the mortgage. This figure fluctuates according to market conditions, repayments, and other variables.

What is refinancing all about?

Let's say you have a mortgage because you are paying off your home. When you refinance a mortgage, you replace your existing mortgage (home loan) with a new one. You do this to secure better terms and conditions. You may wish to pay a lower interest rate (if the prevailing rate is lower than the mortgage rate you locked in), or you may wish to pay less based on a longer term. That's known as changing the loan duration. A typical mortgage can be up to 30 years. If you are halfway through your mortgage, but you can't afford the repayment, you may be able to extend your mortgage and lower your monthly payments.

Here are the main reasons why people refinance their mortgages:

• Lower interest rates – due to interest rates dropping. The Fed may announce an interest rate cut, and this invariably filters through to the property market, lowering rates.
• Debt consolidation – If you have many different forms of debt, you may wish to pay down that debt at a lower rate of interest. That's what a cash-out refinancing solution can provide. You can borrow against the equity in your property at a lower interest rate than you would pay on personal loans or credit cards.
• To access home equity – Again, this option presents you with access to your stake in your property. You can do with your capital whatever you wish, subject to repayment, in accordance with negotiated terms and conditions. Home equity funding can be used for bucket list items, education, a wedding, a vacation, home remodeling, purchasing a rental home, or anything you want.
• Modifying loan terms – Many people refinance into a long-term loan to reduce their monthly payments. But it's also possible to reduce overall payments to your lender by reducing the loan term. The lion's share of your mortgage repayment goes towards interest on the loan (on principal). Therefore, if you shorten your loan term, you reduce the total outlay (notably interest) over the life of the loan.

People from all walks of life can apply for refinancing. There are different types of refinancing options available. You may be a veteran, service member, or eligible family member. In that case, you would want to use a VA cash out refinance calculator to determine what you are eligible for, based on your specific situation. A cash-out refinance allows homeowners to take out cash based on their home equity. Recall that your home equity tends to accumulate with every mortgage payment, subject to market conditions. If the property market gets flipped upside down, then you may have reduced equity. However, if the property market surges, as it did post-COVID, your home equity will increase. It's a unique measure at a specific point in time.

There are also rate-and-term refinancing options. These adjust the interest rate or the loan term, without changing the loan amount. For homeowners who prefer a streamlined refinance option, this simplifies the process for FHA or VA loans, requiring less documentation. Recall that a VA loan is available to veterans, service members, and eligible family members who have a certificate of eligibility issued by the Department of Veterans Affairs. And to clarify, FHA refinancing offers are specific options for FHA loans. These are available to applicants with lower credit requirements.

In all instances, there are considerations to bear in mind. These include refinancing closing costs. Depending on the lender you choose, these costs can be high. Credit scores play a role with many lenders. As a general rule, high credit scores tend to attract the most favorable refinancing terms, while lower credit scores may result in less favorable terms. Naturally, it's always prudent to shop around for the best options. Lenders are a dime a dozen, but the best ones are few and far between. Once you source a reputable lender, apply for the loan, complete the paperwork, and begin the refinancing process.

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