It is fairly astonishing that, with all of the information made available, homeowners don’t know more about their particular finances. Sure, they may know the interest rate and the monthly payment amount, but they probably don’t know the exact tax bill or what their home is really worth. If there is equity, there may be the temptation to pull money out to either finance other projects or to pay off debt. This is a good idea in theory, but before you decide to refinance, you should know exactly what you are getting into.
Just because you saw that your neighbor’s house sold for a certain amount doesn’t mean yours will. A higher price may have an impact on your value, but there are a number of other factors that can affect yours. Before you start looking at rate and proposed payments, you should get a good idea of what your value may be. If you are friendly with a realtor, they can give you a good idea. What you see from the internet alone will not give you the most accurate number. Before you waste your time, and potentially money, find out what your value is.
If you have a good idea of what the value is and know what you owe, you can see if a refinance makes sense. Ask yourself exactly why you are thinking about moving forward with this scenario. Are you looking to pull cash out for a vacation, to pay for school or to lower the number of years you have remaining? If you have 18 years left on the mortgage and you can get into a 30 year fixed with a lower payment and have some cash remaining, this may seem like a home run. The only problem is that you have now added twelve years of payments to your mortgage and you have reset the clock. Like anything else, refinancing is about risk vs. reward. Ask yourself why you are doing this and if it really makes sense.
With the recent changes in law and procedure, you can feel comfortable that you will not be taken advantage of in the mortgage process. All of the fees and costs will be transparent from the time you get your first estimate. You will notice that these fees, taxes and insurance will add up to quite a large amount depending on your tax and insurance bill. Every time you refinance, these are included in your loan amount and will be a chunk of the loan. Essentially, you are financing these items over the course of your loan unless you are willing to bring that money to the closing.
If you are thinking about taking money out, you should consider a home equity line of credit as an alternative to a refinance. With this option, your existing mortgage remains in place but you can pull cash out of the second mortgage. You have now added another loan to the title, but you can keep the terms of the first mortgage and only pay what you use on the second. Like anything else, you need to evaluate if the payment is worth why you need the money. The process can be confusing and overwhelming, which is why it is recommended you discuss this with your attorney and mortgage broker. Just because you have equity doesn’t mean taking it out is the best option for you.
