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Should I refinance my home? (Beginners Guide)

What does it mean to refinance?

Refinancing a mortgage means paying off the loan you already have on your home and subsequently replacing it with a new one. There are a few different reasons why homeowners decide to go this route. Some of which include the ability to obtain a lower interest rate, reduce the payment amount, shorten the term of the mortgage, and to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or the other way around: use up home equity to raise funds in case of a financial emergency/need.

Refinance Strategies & Loans:

There are several ways to go when it comes to a refinance strategy. Listed below are the main ones.

Cash-out refinance: Owning a house can be like having a savings plan. Cash-out refinance allows you to use up your equity by replacing your current mortgage with a new one for more than what you owe and then you get the overage in cash.

Rate refinance: To lower your interest rate, you may want to consider refinancing when rates are lower than they were when you first took out your loan.

Term Refinance: You can lower your mortgage payments by extending the term of your original loan. If you originally had a 10-year loan, you could make it a 20-year loan instead.

VA Loans: A VA Loan is designed to offer long-term financing to veterans. These loans are issued by federally qualified lenders and are guaranteed by the U.S. Veterans Administration. Eligibility is determined by the VA and a certificate is given to the qualifying applicants loan office. For veterans, these loans are generally easier to qualify for over a conventional loan.

Jumbo: A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Designed to finance luxury properties and homes in highly competitive local real estate markets. Jumbo mortgages come with unique underwriting requirements and tax implications. These kinds of mortgages have gained traction as the housing market continues to recover following the Great Recession.

ARM to Fixed: You can change an adjustable-rate mortgage (ARM) to a fixed-rate mortgage when you refinance because a fixed-rate mortgage is a safer mortgage product, says Jason Huffman, the regional Carolinas manager at Silverton Mortgage. Unlike with the ARM, the interest rate for a fixed-rate mortgage never changes.

FHA Loans: FHA loans are a great option when it comes to home financing. They have great benefits, such as a minimum of only 3.5% down payment. These non-conventional loans are secured by the Federal Housing Administration and are funded by private lenders.

Reasons Why You Should Wait/Refrain to Refinance your home:

Are the closing costs worth it? Expect your refinance to run anywhere from $1,500 to $5,000,” says Huffman. “Some common refinance-related fees are appraisal fees, title fees, origination fees, attorney fees, flood certification fees, and recording fees.” Mortgage companies differ in what they are willing to cover, for example, Unified Heroes covers the closing costs for anybody working as a medical professional, law enforcement, firefighter, veteran, or teacher. Make sure to research the company before you start refinancing.

When you are thinking about extending the term. Consider that lowering your monthly payments by extending the loan term will cost you less now, but more later. You’ll pay more in interest over the life of the loan by extending the term.

If you are refinancing for Debt consolidation but your emotions and mind are not in the game. You may use your mortgage to pay off your debt but if all you do is immediately rack up your debt again, then you may be shooting yourself in the foot.

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