Refinance

From Debt Free Dude
Jump to: navigation, search

Refinancing is the process of replacing an existing loan with a new loan. One of the most common reasons for refinancing is to take advantage of lower interest rates. Another reason to refinance is to avoid the balloon payment at the end of a loan. Refinancing can also be used to pull equity out of our property in the form of cash when it's value has appreciated.

Refinancing usually involves a number of fees for setting up the paperwork, doing a new appraisal, etc. Unless the interest rate is significantly lower, those fees may mitigate the benefits of refinancing. Also if the owners are planning on selling the property within a few years, there may not be enough time to reap the benefits of a lower rate when the fees are considered.

Cash out refinancing is a mortgage where the home owner gets money back at closing. This money comes from borrowing more than what is owed on a house. This can be done if much of the mortgage has been paid down or if the value of the house has appreciated since the purchase. Recent rule changes have placed much more strict regulations on cash out refinancing. Under current rules, refinancing can only be done for the lower of the selling price and the appraised value for the first six months after the original purchase. The logic behind this rule is to try to prevent people from buying a house at one price and then quickly getting a much bigger loan simply by getting a different appraisal. When this occurred in the past, may people got into a lot of financial trouble because they owed much more on property than what it would sell for.