Refinancing is simply getting another mortgage, usually at a lower rate, to pay for your house. It can be beneficial because you could receive money to help pay for an addition to house, while lowering the monthly payment you make. But before you refinance your home, here are some things to know.
Are You Eligible?
First, it’s important to know what the requirements are for refinancing your home. Just like when you get a loan for a mortgage, it is important to have a good credit score. If your credit score is below 620, most lenders will not lend you the money to refinance your home. It also depends on if you are planning on staying in your home for at least five more years, and if you have home equity, which is the percentage of the home you own that you’ve paid off through the mortgage. If you have less than 20% equity on your home, you are probably not eligible to refinance your home.
If you have decided that refinancing is right for you, there are multiple options to consider. Fixed-rate loans are loans where the interest stays the same no matter what happens in the market. Adjustable-rate mortgages adjust the rate of interest after a certain amount of time. Another option for refinancing is cash out refinance, which is a loan for more money than what you took out for your first mortgage. It allows you to pay off the existing mortgage, other debts, including closing costs (the closing costs of a cash out refinance depends on a few factors), and receive the rest back to possibly refurbish your house, add on an addition, and anything else you choose.
Know the Risks
Just because the market offers a lower rate doesn’t necessarily mean you should jump straight into refinancing your home. There could be extra costs (known as penalties) that you could acquire from your preexisting mortgage company for taking out a loan on house equity. Know the risks for each of the refinancing options and make sure to read the paperwork before committing to the terms of a new mortgage loan.
If refinancing your home is the right decision for you, make sure that you meet the requirements to be eligible and do research into your options and what risks they carry. Refinancing can be beneficial, but make sure to do your research first.