With mortgage rates at record lows in 2020, the demand for home refinancing jumped 105% between December 2019 and December 2020.
It is no surprise that many homeowners are interested in refinancing with mortgage rates historically low.
At the same time, home sales and home prices have been breaking records as well. For this reason, many homeowners are considering selling their homes this season.
Does it make sense to refinance your home before selling? Let’s dive into refinancing 101 to help you understand when to refinance and when to hold off.
Refinancing 101: Reasons to Refinance Your Home
Before you decide when to refinance or if you should refinance at all, you’ll want to understand why refinancing might be beneficial to you. When you refinance your home, it means that you pay off the loan you currently have and replace it with a brand new loan.
Shorten Your Mortage Term
One reason you might refinance your home is to shorten the mortgage term. When you do this, your monthly payments will increase but you will be able to pay off your home faster. You will also be able to save thousands of dollars in interest.
Lengthen Your Mortgage Term
Another reason you might refinance your home is to lengthen your mortgage term. This allows you to pay smaller monthly payments through which you pay off the loan over a longer period of time. When you refinance for a longer mortgage term, you will end up paying more in interest over time.
Lock in a Lower Interest Rate
One popular reason that people pursue home refinancing is to get a lower interest rate. If interest rates are currently lower now than when you purchased the house, you can refinance in order to pay less money each month and less interest over time. If your credit has improved since you purchased the house, you also might be able to qualify for a lower interest rate.
Change the Structure of Your Loan
If you currently have an adjustable-rate mortgage, the amount of interest you pay each month can vary after you have passed the fixed period of the agreement.
Many people would prefer that their monthly payments are predictable rather than fluctuating over time. You can refinance your home loan to switch from an ARM to a fixed-rate loan if that’s appealing to you.
Change the Type of Loan
It is common for homeowners to refinance in order to switch to a conventional loan from a government-backed loan once they have built enough equity. The reason people do this is in order to no longer pay a mortgage insurance premium.
Take Cash Out of Your Equity
Another reason for home refinancing is to take cash out of your equity. People might do this in order to obtain the money for home renovation projects or other reasons. With this type of agreement, you accept a higher principal balance and receive the cash difference as a loan.
A cash-out refinance is different than other loans because you can use the money for almost any purpose. It is common for homeowners to use cash-out refinances in order to pay off debt they have. The reason this is an appealing option is because the interest rates on mortgage loans are often lower than the interest rates of credit cards or other types of loans.
Are you looking for more home loan refinancing advice? Check out our library of resources here.
How Soon After Home Refinancing Can You Sell Your House?
It is perfectly within your rights to sell your home immediately after you refinance. However, this is not typically a beneficial financial decision. There are closing costs associated with refinancing, and the cost of these mean that refinancing right before selling is rarely beneficial.
Before finalizing your new loan, you will have to pay closing costs similar to when you purchased the home. These costs cover services associated with completing your loan and go to your lender.
When you refinance your home, some typical closing costs you might encounter include:
- Application fee: Sometimes there is a fee to apply for a refinance even if the loan is ultimately rejected by the lender
- Appraisal fee: Another appraisal will likely be ordered by your lender when you refinance in order for them to ensure that they are not loaning you more money than the value of your home
- Inspection fees: In some, but not all, states, another inspection will be required before completing your refinance
- Title search and insurance fees: If you refinance with a new lender, you might have to pay for a new title search and you might have to pay for title insurance again
- Attorney review and closing fees: It is required in some states that your refinance closing be conducted by a real estate attorney
You can expect to pay 2 to 3% of the total loan value towards closing costs. However, the type of loan you take out will dictate how much you pay in closing costs.
It typically takes time to recoup the closing costs you put forwards in the form of the money you save from refinancing. This is why refinancing your home loan right before selling it usually doesn’t make financial sense. In general, it’s said that you should live on your property for at least five more years in order for refinancing to make sense.
If You Do Plan to Refinance, Finding the Right Lender Can Make All the Difference
The decision to refinance your home is not something to take lightly. It’s important to understand the pros and cons before paying off your existing loan to begin a new one. It typically doesn’t make sense to refinance your home if you aren’t planning on living in the same home for at least five more years.
Are you interested in refinancing your home or getting a home loan? If so, you can get a free quote from Robus Mortgage today!