Refinancing 101

Many homeowners have heard the term refinancing, but not all thoroughly understand what it means, or when it is appropriate. Refinancing your home is when you pay off an old loan, and take out a new one. “Refinancing is a sensible decision when you can take out a new mortgage with a lower interest rate,” explains Connie Ray, President/Owner of Coldwell Banker Platinum Partners.

What do you need?

There are a handful of things that are generally required to refinance your home, according to Ray. These include a steady income, home equity, and a good credit rating. Refinancing is essentially applying for a mortgage all over again, so be prepared for any accompanying costs and be sure you can afford them.

When is a good time?

Refinance your home when mortgage interest rates are low. “Refinancing is only sensible if you can get a new loan that is at least two points below your current loan rate,” explains Ray, who goes on to warn that when refinancing, you will have to pay all closing costs that go along with getting a new mortgage. “If you can’t afford this, or your new loan rate is not two points below your current, then it may be better to choose a different financing option.”

Other reasons to refinance include shortening the term of the mortgage to build equity faster, lowering monthly payments or switching from an adjustable rate to a fixed-rate mortgage.

Additionally, Ray suggests that you don’t refinance if you plan on selling your home within five years, as refinancing can cost around 2 percent to 3 percent of the total loan amount. If you aren’t planning to stay in your home for long, the costs you take on to refinance may outweigh your monthly savings.

“Don’t forget, if you plan on staying in your home for a long time, and mortgage rates are on a downward trend, you can refinance multiple times,” says Ray.

Refinancing can be a great way to save money or speed up the process of equity building. However, talk it over with your lender each time you are thinking of refinancing, to be sure it is financially feasible for you and your family, suggests Ray.