10 Things to Know Before Refinancing Your Home
Summary
Homeownership is more than an investment. It can also provide access to cash through your home's equity. Homeowners can borrow against that equity to fund home improvements, consolidate high-interest debt, build savings, or cover major expenses. The three main options are a cash-out refinance, home equity loan, and home equity line of credit (HELOC). A cash-out refinance replaces your existing mortgage with one larger loan and a single monthly payment. A home equity loan offers a lump sum with fixed payments, while a HELOC provides flexible, revolving access to funds. Each option serves different financial goals.
Refinancing can be a significant financial decision, offering the opportunity to potentially save money, reduce payments, or even tap into home equity. However, before diving into the process, it’s crucial to understand various factors involved so you can make informed choices, determine which home solution best meets your needs, and maximize the potential benefits of refinancing your mortgage. Let’s explore ten key things you need to know.
Your Financial Goals Should Be Clear
To determine which financing options are best suited for you, you need to determine what your goals are. Are you looking to own your home sooner? Maybe you need affordable financing for home repairs or you’re looking for a way to free up cash every month. With countless options, it’s important to have a clear vision and goal before you can move forward.
Discuss my goals with an Onity Loan Officer.
You Can Refinance to Get Cash
With a cash out refinance you can use your home equity to get cash back. You receive the money almost immediately and can use it any way you want. Whether it’s to pay off high interest credit cards, home improvements, pay off your car loan, or invest in your future, you decide how you will spend the money. Cash out refinancing is one of the most affordable ways to get financing needed to meet your goals.
Learn more about cash-out refinancing.
You Can Shorten Your Loan Term
Refinancing may allow you to shorten the length of your remaining loan term. Typically, reducing the repayment period means less total interest paid because you’re paying interest for a shorter period. Keep in mind while the total interest paid over the life of the loan will be less, it doesn’t necessarily mean the interest rate will be lower. But it can still result in significant savings.
You Can Lower Your Payments
Refinancing at the right time, like when interest rates drop lower than your current mortgage interest rate, can put you in the position to benefit from a mortgage refinance with lower monthly and annual payment options. Even if interest rates haven't fallen since you took out your mortgage, you may still be able to get a lower monthly payment by refinancing into a loan with a different payment schedule.
Use our mortgage refinance calculator.
You Can Remove PMI When You Refinance (Private Mortgage Insurance)
If your home value has increased enough since you took out your mortgage, you may be able to refinance into a new loan with a lower loan-to-value ratio (LTV). This means that your new mortgage balance will be less than 80% of your home's value, which will allow you to cancel PMI.
To qualify for a refinance to remove PMI, you will need to have at least 20% equity in your home. You will also need to have a good credit score and be able to afford the higher monthly payments that may come with a new loan.
What Determines Your Interest Rate
Current market conditions are a primary factor, but there are other influences that determine what rate you may qualify for, such as credit score, late payments, the length of your credit history/inquiries and your new mortgage type.
Know How Much You Owe
Before refinancing, you’ll need to reach out to your lender to find out the payoff amount on your existing mortgage to determine how much you will need to borrow for your new loan. You can also ask whether your current lender charges any prepayment fees or penalties for paying off your current mortgage early.
You’ll Have Many Loan Options
There are several options available when refinancing your home, ranging from loans that give you a more stable interest rate to those that help consolidate your debt. Work with your lender to determine what loan works best for you. Onity Mortgage offers Conventional, FHA and VA loans with multiple term options.
Refinancing Will Also Cost Money
In addition to the closing costs associated with any new loan, there are also specific costs associated with refinancing, such as appraisal fees, title insurance, and origination fees. These costs can vary depending on the lender and the terms of your new loan. Your loan officer will be able to provide more detailed estimates.
You Can Change Your Mind
By law, you have three business days after you sign your loan contract to cancel the loan for any reason. For this same reason, you do not receive any money until three days after signing the contract. This applies to primary residences only.
Refinance FAQs
Credit is an agreement to borrow money with the promise that you will pay it back later through scheduled payments. It usually includes interest, which is additional money charged for the privilege and convenience of borrowing.
- To reduce monthly mortgage payments: When a lower interest rate on your loan is available – typically 1% or more – refinancing can help you save money every month.
- To cash out a portion of the equity in your home: You can get extra cash by obtaining a new loan for a balance larger than the one on your existing loan. You can then use the cash for anything from home improvements to college tuition.
- To obtain a stable interest rate: You may be able to switch from the uncertainty of a variable interest rate to a more stable (and possibly even lower) fixed rate.
- To consolidate debt: Similar to a cash out refinance, debt consolidation allows you to take out a new loan for a larger balance than your existing mortgage. You can then use the cash difference to pay off any higher interest debts you may have. Essentially you are using your home as collateral for the consolidated debts.
- To pay off your mortgage sooner: You can switch to a shorter repayment term, which can help you save thousands of dollars in interest payments.
To help decide if it makes good sense to refinance, start by speaking with an experienced loan officer, call 1-877-319-0577.
One of the best ways to establish good credit is by making all of your credit payments on time. For more about the benefits of good credit, and strategies for establishing, building and maintaining it, talk with a credit advisor.
In general, a mortgage payment is considered late, or delinquent, if it is received 15 days beyond the due date. A payment is considered to be in serious delinquency when it is 60 to 90 days late. Consequences may include costly penalty charges, default on the loan and possibly foreclosure on the property.