What Exactly Does Refinancing Mean?
If you own a home, you probably have a mortgage. This is a type of loan that is given out by a bank or other lender to allow you to make a large purchase. The catch is that the lending institution charges interest on the loan. These interest rates are constantly changing and there are different rates depending on the length of your mortgage. For example, a 30-year fixed mortgage interest rate may be 2.750% while a 15-year fixed rate is 2.00%. A person with a 30-year mortgage with higher interest rates will ultimately pay more for their home than someone who can afford the monthly payments of a 15-year mortgage with lower interest.
Sometimes overall interest rates will drop significantly. In order to take advantage of the lower rates, you might decide to refinance your home. Refinancing means that you get your lending institution to pay off your current mortgage in exchange for a new mortgage with a lower interest rate. You may choose to change the terms of your mortgage as well, such as moving from a 30-year to a 15-year mortgage or changing from an adjustable-rate mortgage to a fixed rate mortgage.
Even though you may be able to lower your monthly mortgage payment after a refinance, you want to make sure this is a financially wise decision. This process is not simple and there are costs involved. Here are some things to consider:
- You’ll be required to pay 2%-5% of the balance you have left to pay on what you originally borrowed (the loan principal).
- Remember the closing process you went through to purchase your home originally? That process will be repeated during the refinancing process. You’ll have to pay closing costs, sign multiple documents, etc. You may need an appraisal of your home, title insurance and other services that can be managed by a title company.
- If you plan to sell your home in a few years, refinancing may not be the best option.
Other Reasons to Refinance
Besides locking in a lower interest rate and getting a lower monthly payment, there are other reasons people refinance their mortgages. If you need cash for a large purchase such as a home renovation, debt consolidation or medical procedure, you may qualify for a cash-out refinance. This allows you to refinance as much as 80% of your home’s current value for cash – assuming you have enough equity built up in your home. Your new mortgage will be set for more than you currently owe on your home and you will get the difference in cash. The interest rates may be higher on this type of refinance.
If you are wondering if refinancing is a good idea for your unique situation, the team at Clear Title can help. As a title company in Pensacola, Florida, we help existing homeowners navigate the refinancing process. Our founder and CEO is Board Certified Real Estate Attorney Stephen R. Moorhead, an expert who has been in the closing business for over 30 years. To schedule a meeting with our experts and explore our Pensacola title services, contact us today at (850) 202-8518 or visit ClearTitlenwfl.com.