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Posted by on Jun 6, 2014 in Blog, Finance & Money | 0 comments

A First-Timer’s Guide To Refinancing

If you are a first-time homeowner who is currently paying on a mortgage, you might believe that if your family gets in a bind for cash that you can refinance. It’s a beautiful notion, but it doesn’t always work. Before you sit down with a mortgage broker, check out this guide so that you will know ahead of time whether refinancing is an option.

What Refinancing Means

Refinancing is replacing an old loan with a new one. These new loans can start over at the amount you originally purchased your home for, or you can refinance your current mortgage balance for a lower interest rate, or for a shorter or longer term.

Additionally, if your home is worth more than when you initially purchased it, you can cash out that money as well. For example, if you owe $100,000 and your home is worth $140,000 you can refinance the whole amount and use the additional $40,000 (minus closing costs) for whatever your needs are.

Keep in mind that if your home is worth less than the purchase price, then your refinance option is limited to that amount. Most financing institutions will not allow this without a down payment to make up the difference.

When to Consider Refinancing

There are many reasons people choose to refinance. Because it is a quick procedure, you may consider it if you are faced with any of these situations:

  • Your children need college tuition
  • The government lowers interest rates
  • Your home needs major improvements or repairs
  • A family member needs medical care
  • You need a lower payment
  • One of your children is getting married

Keep in mind that if you have been paying your mortgage for many years, you will lose all that ground you made if you apply for a 30-year mortgage. You are basically starting the loan over, unless you opt for a shorter repayment period.

When You Can’t Refinance or It’s a Bad Idea

Those who refinance have typically been paying on their loan for several years and wish to tap into the equity that is in their home. Unfortunately, it is not always possible. Here are some of the reasons why you may not be able to refinance or it might not be in your best interest:

  • The home is worth less than you owe.
  • The closing costs will make the new amount owed more than what is currently owed.
  • Your credit is not as good as it was during the original mortgage.
  • You are so close to retirement that you won’t be able to pay the loan off.

The trick to determine whether you will be able to refinance is to keep track of what your home is worth, and have a good understanding of what your overall-financial picture looks like.

Refinancing is not for everyone. Check with your mortgage broker or people at places like Mortgage Architects before you begin making plans. They will be able to tell you whether a refinance is an option, and how it can help you reach your specific goals.

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