What does it even mean to get a refinance? Should you do it? If you’re facing this dilemma, we are going to help you decide. Banks usually send their clients mortgage refinancing offers with lower interest rates than usual, however, is it really convenient to refinance a home in times like these?
It is necessary to carry out an analysis with the pros and cons of refinancing a house and its debt, and also compare both scenarios taking into account all the factors involved.
To do this, we must start from the two types of refinancing that exist: regular refinancing and the so-called “cash out refi” which is commonly used by investors to receive cash in exchange for the value of the mortgage.
Before we start doing the analysis of whether you should actually pursue to refinance your house or not, let’s just talk about the type of refinancing available in the market.
There are two types of refinance in the market:
- One is just the traditional refinancing, known as the “Refi”.
- There’s another one that’s called the “Cash-out refi”.
Refinance your house: How does the Cash-out refinance work?
1. You have a house and that house costs $200,000. You put your down payment and you still owe $150,000 in the house. $150K and your rate is at 6% so you got an offer in the mail and that bank or a lender is offering you to refinance this amount, a $150,000 but this time they’re willing to give you a lower rate because the rates are low nowadays. That will be 3%. That is one type of refinancing.
2. The second type of refinancing can be explained with the following example: You have a house or a property and the total mortgage you have to pay is $200,000. Over time you managed to pay down the debt, you bought the house with a higher down payment and the house appreciated over time so you managed to accumulate a good amount of equity. Let’s say that your equity in this house is $100,000.
A cash-out refi, it’s when you go to a bank and say: “I want to do a cash out refi on this.” What the bank does is they will create a new mortgage and they’re going to give you $100,000 cash for you to spend it on whatever you like. Ideally you will spend that in your Real Estate Investment and what you will do is that you will sign a promise to pay the bank over the course of 15 years or 30 years or so.
In essence, it’s a new mortgage but it’s a mortgage where you receive cash. Rather than you having to pay the mortgage you receive money and that’s a cash out refi.
Refinance your house: Traditional Financing
Now, it’s time to talk about traditional financing in general. First, you have to consider other expenses. Every time you go through a refinance you are basically creating a new mortgage. That means you will have to provide your tax returns at the bank, it’s going to have to pool your credit.
You’re going to have to show your pay stubs and fill up application forms, pay for an appraisal and other similar things. The whole ordeal that signing up for a mortgage involves. That includes having to pay once again for appraisals and also having to pay for your credit report because the lender has to pool it but you have to pay for it.
About our credit report, we’re talking about lawyers or attorneys because depending on the state that you are, you will probably require one at closing. We’re talking about attorneys, perhaps a title agency and the list goes on.
You can choose to pay those expenses separately on your own or in the refinance you can choose to get whatever the cost of this was into the mortgage itself. That way you can repay that over time but with interest.
Now that you know all of that, the question once again is: “Should I refinance?”, “Should I refinance or should I just move on?” It depends on how much you owe on that mortgage. If the house costs $200,000 and you still owe $150,000 in it and you’re getting the opportunity to reduce that interest rate from 6% to 3%, then you should take it because you will definitely save a lot of money in it. If whatever is left on that debt, for example, instead of $150,000 it’s $20,000 then it’s not worth it because the closing cost is going to be roughly 3% to 5% of the amount that you’re refinancing.
You’re spending a lot of money in fees for such a small amount. $20,000 can be something that you can easily pay off with a credit card at a 0%.
Take into consideration that if you’re owing such a small amount it’s just not worth going through all of that hassle just to refinance $20,000. Do it when it’s such a large amount because over time you don’t want to end up paying a lot more in interest than your house is worth.
- “How do I know which lender is more convenient?”
You will typically choose the one that has the best rates or the ones that give you more flexibility in terms of payments. Maybe longer years, maybe shorter years depending on what your needs are. Hopefully you will be in a much better position to decide whether that’s going to be the right thing for you to do or not.
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