01/11/2021
Refinance 101
Refinancing is when you renegotiate the terms of your mortgage. You do this either with the lender you currently have a mortgage with or with a new lender. With either option, you pay out your existing mortgage and start a new loan contract with new terms. Refinancing allows you to access 80% of the appraised value of your home. For a rough example:
- Appraised value of your home is $500,000
- 500,000 x .8 = $400,000
- Mortgage balance is $300,000
- Available funds through refinancing = $100,000
*Remember, if you have any debts secured against the property, like a line of credit, you will have to pay this out before accessing the funds. *
Refinancing is a good option for people who need to consolidate debts. Instead of juggling various credit lines, car loans, etc. you can pay them off with the funds that you have acquired through refinancing. Now your debts are in one place, amortized over the same time period (which is typically longer than the mortgage you had before refinancing). Some people find this an easier way to manage their liabilities. You can refinance for various reasons: To pay for your kid’s college, for renovations, for starting a business, the list goes on. It’s also just a good way to secure a loan with a lower interest rate! It’s a smart strategy in a falling rate market.
Refinancing is very similar to buying home. The application is identical, and will also require an appraisal. If you’re switching lenders, the pay out penalty might be a big one, but it’s often worth paying out in order to meet the goals you’re trying to achieve with the refinance. A good rule of thumb is to be in your home for about a year before refinancing, although there are sometimes exceptions to this 😊 .
