For most homebuyers, the word “refinance” is a pretty intimidating term. It seems like such a huge, life-changing decision—one that has caused more than a few homeowners to see serious financial ruin.
However, most refinances go off without a hitch, and can be an excellent tool for homeowners to use. The trick is knowing when to use them, which is why we decided to craft the ultimate refinancing guide. Go into your refinance confident using these refinancing tips from Rocky Mountain Mortgage Co.!
What Is A Refinance?
A refinance is a simple renegotiation of the terms of a loan between the debtor and creditor. Refinancing is most associated with mortgages, but it is used for all kinds of loans (like car and student loans). Most people will decide to refinance for two reasons: either their financial situation (income, credit score, long-term plan, etc.) has changed, or interest rates have changed.
The type of refinance that you use will depend on your situation; some refinancing involves taking out equity while others don’t. Before you decide on a plan, it’s best to learn about each type of refinance and their pros and cons.
Types of Refinance
Depending on the type of loan and the debtor’s needs/financial situation, different types of refinancing will be available. The most common type of refinancing is rate-and-term refinancing. Rate-and-term refinancing simply means either the loan’s rate, term, or both are changed but the principal doesn’t change.
Rate-and-term refinancing is great when the credit of the debtor improves, interest rates decrease, the financial situation of the debtor improves (or worsens). For example, if interest rates fall, a homeowner may want to refinance the remainder of their mortgage at that interest rate. This may lengthen the term a bit, but monthly payments will be much less than before.
There are also some refinancing options that change the principal on the loan. Two examples of these refinances are cash-out and cash-in refinances. Cash-out refinances involve taking equity from the home for the homeowner to use how they please and adding it to the principal. Cash-in refinances are the opposite; homeowners pay off a portion of the principal and readjust the loan for the remaining amount.
What To Expect During A Refinance
Since a mortgage refinance involves reworking the loan agreement, the creditor will have to do their research on your financial situation before drafting the refinancing agreement. That’s why you should make sure you have all of your finances in order.
If you’ve gotten a raise or your credit score has shot up lately, it would be a great time to refinance. You will have more flexibility in the new loan negotiation, and can potentially save thousands over the course of your new loan.
If you plan on doing a cash-out refinance, your creditor will reappraise the home to see how much more valuable it has become since you purchased it. If the amount you want to cash out doesn’t exceed the added equity or value of your home, there’s a great chance that you’ll be approved.
However, a refinance will usually restart your loan, which is a very important point. For example, if you refinance a 15-year loan after 5 years for another 15-year loan, the new total loan payment time would be 20 years. So if you plan on refinancing, plan on paying for a longer period unless you get a shorter-term loan.
There will almost always be closing costs as well, so it’s important to ask your lender about the closing costs so you can be prepared. Almost all refinances will come with some sort of fee.
What You Need For A Successful Refinance
As stated earlier, the best time to refinance is when you are in a good financial situation that you feel stable in. Steady, robust sources of income, a good credit score, and less debt will make a refinance much easier to handle. That way, you can make adjustments to your loan agreement confidently and with little chance of not being able to make payments.
It can also help to pay down the principal early, meaning you need to refinance with a lender that won’t penalize you for extra payments. You can save thousands in interest over the course of your mortgage if you pay a little extra every month.
Lastly, it’s a great idea to reconsider the type of rate that your loan has. Fixed-rate loans offer predictable monthly payments, while adjustable-rate mortgages are more unpredictable but allow you to take advantage of any falling rates. Be sure to do plenty of research before settling on a rate.
Choose Rocky Mountain Mortgage For Your Refinance
If you’re ready to refinance, Rocky Mountain Mortgage Co. can help! Over the years, we’ve helped thousands of El Paso families get the financial assistance they needed, and we’d be happy to help you too! Contact us today!