Within the past five or six years, refinancing a home has been like gold for many people. People were purchasing homes like crazy, and not giving much consideration to the interest rates, terms or conditions of their loan. Their mindset: let me get the home now, and I’ll just refinance and get a better rate and term later. The problem: when you refinance you are getting a new home loan and starting over from scratch. Additionally, many people then decide to take out equity from their home to spend on things they feel they need or don’t need. The other problem is that no one can predict the future. Who says you will be in a position to refinance again in one or two years. Banking on an uncertain future is what has caused so many foreclosures today.
Refinancing can help you in some situations, but overall it can be harmful.
When you refinance your mortgage you will have upfront fees; you will pay closing cost, an application fee, appraisal, origination fee, and any interest buy-down points. Refinancing can be expensive. Also, if you make a decision to move before your refinancing has paid for itself, you will have wasted money instead of saved. If for some reason you do decide to refinance, look for a mortgage that has no-points and no closing cost.
There are two different types of refinance loans.
Cash-out refinancing
Cash-out refinancing is when you borrow more money than you owe on your current mortgage. You are usually restricted to borrowing no more than 75 to 80 percent of your home's appraised value with cash-out refinancing. You can use the surplus cash any way you desire.
No cash-out refinancing
With a no cash-out refinance loan, you can borrow a larger percentage of your home's appraised value. No cash-out refinancing is typically done to reduce the interest rate on the loan and to change the term of the mortgage. No cash-out refinancing is also known as a “rate and term” refinance.
Even though refinancing isn’t usually a good idea, if you have an interest only mortgage or an adjustable rate mortgage (ARM) it would be wise to refinance in order to get a fixed rate loan. If you refinance to a fixed rate loan, the goal is to get an interest rate that is either similar or lower than the ARM or interest only rate.
There is a lot to consider when making a decision to refinance your home. It’s harmful not to have a plan as to why, when, where and how you will refinance your mortgage. The bottom line is that you must decide if refinancing is good for you. Only you know if it makes sense for your situation.
Sharman Lawson is a financial coach, speaker, and author of the book 12 Steps to Eliminate Debt Forever! Visit her website at www.freedomconceptsusa.com.
