Before refinancing your home, you should take the time to understand what exactly that means.

The process certainly can be confusing and a bit overwhelming, but hopefully this article can provide some confidence and understanding as you consider refinancing.  

What is Refinancing?

Refinancing takes place when you replace your current loan with a brand-new one. This new loan generally comes with new terms including an updated interest rate and a new number of years to pay the loan off.

Refinancing is often a form of debt reduction and can help those struggling with payments, making the payments more manageable.

Reasons to consider Refinance

Lower Interest Rate

For many people, the allure of having a lower interest rate is enough to push them into refinancing. If you got your loan at a time where interest rates were remarkably high, then there may be a large change in your interest rate percentage. Depending on the amount in the loan, dropping a percent or two may drastically change the long-term cost of your loan.

Change in Loan Term

Normally, a change in loan term results in fewer years overall for your loan. However, when changing the length of your loan, the option to raise the loan amount is available.

Depending on what your income is, what your other expenses are, and how much you want to pay on your loan will decide how you change the loan term.

Cash-out refinancing

A cash out refinance is when you change your current loan to a larger loan. The reason someone would do this is to gain access to cash from your home’s equity. This cash is typically used for home renovations or larger purchases.

When considering this option, it is important to think through the break even and make sure it works in your timeline.

Most financial professionals do not recommend this option for most people as it leads to more debt.

This option is also generally available only to those with a very good credit rating of 700+.

Who qualifies for a refinance?

The conditions needed for a refinance will change from person to person and depends on what the specific mortgage lender lays out.

That being said, generally there are expected circumstances.

Some of the basic criteria can include a mortgage in good standing, a reasonably high credit score and a debt-to-income ratio (DTI) that isn’t too high. More on the conditions can be found on mortgage reports.

Are there closing costs in a refinance?

Yes, closing costs are connected to refinancing just as they are with a mortgage. If you do not know what closing costs are, we wrote an article looking into what they are and how they affect you in the purchase of your home.

Are refinances limited to homes?

While refinancing is often connected to mortgages, it is not limited to housing debt.

Since refinancing is simply the transferring of your current loan into a new, updated loan with different terms, it can affect any loan you have.

Many people have refinanced their car loan, personal loans, student loans and just about any other debt.

Should you refinance?

Since there are so many factors that go into determining debt reduction, before you decide to refinance any loan you should talk to a financial professional who can see your personal finances and help you make the best decision in your specific circumstances.

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