Written by A refinance, simply put, is taking out a loan that pays for the principle and interest on your current loan. People do this in order to take advantage of interest rates that are lower than when they first received their loan. While this typically adds some years to the loan, it can save thousands of dollars in interest over the life of the loan, as well as reduce your monthly payment. If the refinance does not do at least one of these two things, then there is no point in it. There are also other reasons why people will refinance, rather than simply lowering their monthly payment.
Sometimes, you will see people refinance on their rental properties in order to increase their cash flow received from that property. A rental property is as good as the return it is giving you on a monthly basis, and if you plan on holding onto that property as a rental for more than a few years, then this may be a good way for you to increase your return on investment.
Other people utilize their ability refinance for more than what is needed to pay off their original loan, or “cash out.” By doing this, the person can take money out of their home without having to get a second mortgage, or a home equity line of credit, which typically have higher interest rates than first mortgages. This is especially true, since we are refinancing in order to take advantage of the lower rates. This money can be used toward debt consolidation, home improvements, or anything that requires a lump some payment. In any case, it tends to be a good idea to put the money in your home to work for you, rather than letting it sit there idly, and potentially being lost with the swinging of the real estate market (something that we saw with countless homes these past few years).
Typically, people can expect about three thousand dollars in closing cost when they are trying to refinance. The good thing with these loans is that they are able to roll the costs into the loan, simply increasing the loan amount, rather than having to come with the money out of pocket, like on a typical first loan. The loan to value ratio is traditionally eighty percent (the percentage of the value of the home you can borrow up to). This ratio raises to eighty five percent with an FHA loan, but you can expect to have to pay mortgage insurance on a monthly basis. So, depending on what your plans are with the funds taken out, either one of these offers both opportunities and downsides.
