Refinancing Your Home

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Your house is like a nest egg. Equity is stored inside and taken out as cash. By refinancing, you can use that equity to reduce debt or free up some necessary dollars. It’s hard to believe the couple down the street can sell their house for that amount—so just imagine what your home would be worth on the market! That’s what equity is all about. Homes that appreciate over time due to demand, economics, or home improvements are like savings accounts that guard your stash of cash. If you’re looking to find extra money, pay for college, pay off debt, or reconfigure your existing debt, a good place to look is at the built-up equity in your home. By refinancing your existing mortgage, you may be able to take some cash away, reduce your monthly payments, or move closer to ownership. There are many reasons for refinancing, all of which focus on the value that has accrued in your home. Refinance to Capture Equity Many homeowners see their homes as a sort of savings account and choose cash-out refinancing. With cash-out, they take out a larger home loan to pay off the previous mortgage and have money available to them. The extra cash might fund a college education, a home improvement project or a major trip. With this type of refinancing, a lender requires a homeowner to have at least 5 percent equity accumulated in the home. Lower Monthly Bills The most common reason to refinance is to obtain a lower mortgage rate and reduce monthly mortgage payments. It’s definitely time to consider refinancing if you plan to remain in the home for several years and the interest rate has dropped at least one percentage point below the existing home loan rate. This is especially true for homeowners whose questionable credit history has forced them to buy their homes with high-interest loans. A consistent payment history could now make them eligible for a better interest rate. Depending on job situations or the economic climate, some homeowners are refinancing to lock in a good rate as they switch from an adjustable-rate mortgage to a fixed-rate mortgage. A fixed-rate loan will provide a guaranteed monthly payment amount for the life of the mortgage, which is reassuring when interest rates start to climb. Lower Payments The divorce was final and Donna had received the house in the settlement. In an effort to show her independence, she decided to refinance at the same amortization schedule they had been on together. She had a good job and would do just fine, thank you. A year later, after her anger had subsided and she had gotten back into life, she found that the 5.00 percent APR 10-year schedule she had locked herself into was a tight squeeze. The monthly $1,060 payments left her with little extra cash to spend on vacations, for fun with friends, or to put into savings. She checked around and found that through her present lender she could save the $350 appraisal fee and reduce closing costs to $650 if she refinanced the $100,000. She locked in a 5.50 percent rate for 15 years. At the new schedule although she would pay more in interest in the long run—she could feel more at ease paying $817 a month. Cash-Out Equity Molly and Ray had high-paying jobs. They had paid down their $250,000 home loan to 60 percent, or $150,000, of the loan amount. With higher-interest credit card balances from a long-awaited anniversary holiday and a boat loan, they decided to access some of the equity in their house with a cash-out refinance. The closing costs of $2,000 would be added to the $23,000 in equity taken out. The new mortgage amount was $175,000, held to the same loan term and at an interest rate just slightly above the present one.

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