Home loans and mortgages are the primary means by which buyers purchase real estate. There are many different loan types and, according to the National Association of REALTORSⓇ roughly 70% of sales are financed in some manner1. After the original purchase, homeowners may choose to refinance their loan for a variety of reasons.
Why Refinance a Home Loan?
The most common reason homeowners choose to refinance a home loan is to lower the interest rate and, therefore, lower monthly payments. Loan terms can also be changed from a 30-year term to a 15-year term in order to pay off the note faster. Homeowners may also want to change their loan type, such as switching from an adjustable-rate mortgage to a more predictable fixed-rate mortgage. There are many factors to consider based on each unique situation.
Things to Consider for Refinancing a Home Loan
Known as a “seasoning period”, this six-month waiting period allows lenders to look for on-time payments and an account in good standing. After this time, and assuming the account is in order, refinancing can then be an option. If you are behind on payments or have declared bankruptcy, refinancing may not be available.
A high credit score, generally above 620, is important to maintain even after securing your original loan because it will help you get more favorable rates and terms.
Home equity is the amount of money you “own” on your property calculated by subtracting your remaining loan amount from the current market value. With more than 20% equity, there are other options available, such as removing mortgage insurance.
Since refinancing replaces the current loan with a new one, the loan timeline also resets. This means that if you have made payments for 20 years on a 30-year mortgage, you will start over with either a 30- or 15-year term. Depending on the rate and length, you may end up paying more interest over time.
Closing costs are what lenders charge for the administrative expenses associated with processing the loan. These can range from 2-6% of the loan amount and are due at loan signing. A general rule of thumb is that it will take about two years to recoup closing costs.
There is an industry saying, “Date the rate, marry the home”. With most home loans, you are able to refinance as needed to make your investment work for you. Please contact your lender for more personalized information about refinancing your home, and we are happy to connect you with some of the local lenders that we work with if you don’t already have a lender relationship. For additional real estate information, please reach out, we would love to help.
1Lautz, Jessica. “The Share of All Cash Buyers Highest since 2014 at 32% of All Buyers.” National Association of REALTORS®, 23 Feb. 2024, www.nar.realtor/news/economists-outlook/the-share-of-all-cash-buyers-highest-since-2014-at-32-of-all-buyers.
