There are many crucial factors to take into account when you are considering refinancing your home. You will definitely see many kinds of terms, such as loans with 2% rules and the no-cost refi loan. You'll also come across terms that you are likely not familiar with. In order to make a better and more prudent decision regarding refinancing, you must learn some common terms and conditions so that you can choose the best refinancing option for your needs.
1You Can Refinance In Your Own Best Time
During the early stages of buying your new house, perhaps refinancing is the least of your concerns; but, in such cases, time is not a very significant factor. Prices have increased drastically during recent years. Thus, if you do choose to refinance as soon as possible, you could still enjoy a portion of your equity in cash.
For some homeowners, the decision is easy to make. Refinancing is perhaps the best option as this could reduce monthly payments or make money available. On the other hand, there are also times when refinancing is not the wisest decision, which is why you must meticulously study and weigh your options. A number of homeowners also, choose to refinance their properties so that they could save more on considerably high-interest rates.
2You Need To Know The 2% Rule
Many homeowners are familiar with one of the most well-known refinancing rules, which is the two-percent rule. The rule is simple: homeowners are advised to wait for interest rates to decrease to two percent before deciding to refinance their properties. Another factor that helps people to make a decision about refinancing is whether or not they need money, as soon as possible.
In addition, it is better to refinance once you discover that you are eligible, thus making refinancing possible; this is particularly true for homeowners whose credit scores have decreased after they have purchased their homes. Before, many were also deterred from refinancing because of the fees associated with it. These days, people no longer need to pay the two percent if they do opt for this type of loan. Actually, no-cost refi's are now more common in today's mortgage business. Compared to a few years back, refinancing is definitely more affordable today.
3A Higher Loan Rate Minimizes Costs
It is possible to eliminate all related costs, in case you do choose a loan with a higher rate. When you do find yourself in such a situation, it's more prudent to refinance as soon as you see a rate that will allow you to pay a reduced monthly fee, without adding more to your overall balance. However, you should make sure that you do not incur other extra charges.
Let's say that your mortgage is $100,000 with a 7% rate, and your monthly payment is $665. Perhaps, at this time, you also see a great opportunity to refinance; thus, you could lower your interest to 6% and your payments per month will also go down to $600. Be aware that such will often come with a price - a closing cost of $2,500, for example. But, it's also possible for you to ask your lender for a no-cost plan so that you can waive other fees and maybe compromise to an interest rate of 6.375%.
4You Can Find A No-Cost Refi
With a new loan, your payments can be reduced to about $624 every month so you will be able to save $41 from the usual payments; but, this means it is $24 more than what the amount would have been if you also paid a closing fee. In such cases, what you can do is to find a no-cost refi. A few years back, more homeowners were encouraged to get refinancing a couple of times every year due to the lower interest rates, and that the no-cost refi's were gaining popularity then.
Still, excessive refinancing is not recommended. There are even lending companies that penalize those who have quick turnarounds. There is also a provision that states, that a penalty of at least $500 could be imposed on borrowers who refinance the loans that they have just received within six to thirty-six months.
5Some Lenders Don't Impose Refi Penalties
When the market is healthy and competitive, you will find lenders who do not charge penalties for refinancing a couple of times a year. You can readily find one by doing a little research and comparative shopping. Keep in mind, that you also do not want any refinancing issues to have a detrimental impact on your credit rating, and you can likely avoid this by waiting at least six months.
Refinancing is also not a very good idea once interest rates begin to rise. The monetary benefits of refinancing are little to none if, say, you go from a 5.2% mortgage to one that's 7.7%. It is also important to consider the fact that refinancing will force you to take money out of the equity of your property. Most financial and real estate experts advise against this, except if you have a very good reason to opt for this.
6Timing Is Quite Crucial
Only you can decide the aptest time for you to refinance. There are definitely several ways to get a large sum of money very quickly, but many of these options are bad ideas. An example of a bad idea is to get money from your property for something impractical, like a vacation or a new car.
When considering the best way to spend your hard-earned cash, always think about timing. Remember that a mortgage is a long-term debt, and you'll probably be paying it for fifteen to thirty years. As for buying a new car, it's a short-term loan that you could pay within five to seven years, and after such time, you'll likely be looking for a new one anyway.
7It's Not Wise To Use Refi When Buying
Avoid using a refi to purchase something like a new car, because it is a debt that you'll be paying for fifteen to thirty years. This means that you'll likely still be paying for it even after you no longer have the vehicle. It's not a good financial move to borrow money for short-term purchases and pay them later.
There is, however, one exception and that's a home-improvement project. It is fine to take some equity from your property and use the money on renovations that will increase the value of your house. Renovations add back to the equity as well, depending on what improvements were made.
8Renovations Don't Always Give Value
Home maintenance and renovations are recommended, but avoid going overboard as your neighbors might interpret this the wrong way. Usually, homeowners tend to redecorate or renovate when the economy is doing well and when property values are on the rise. Naturally, once you observe that prices are decreasing, it will no longer be prudent to spend on costly improvements, when you know that your house today will be worth less tomorrow or the next day.
When it comes to home improvement, you should remember that you will never likely get back the exact same amount that you spent on it. In general, home improvement costs more than how much it will add to the property's value. There are exceptions though, as in some cases of bathroom or kitchen renovations.
It is crucial to carefully weigh your options first before opting for refinancing so that you'll determine whether it's the wisest move or not. In case you are still confused about what your next step should be, perhaps you can ask for help and advice from a trustworthy and experienced real estate expert. He will help you to see the big picture and assist you in determining whether or not refinancing is the best step that you can take today.