Regardless of how much the interest rates fluctuate, people will continue to buy and sell homes. Our previous blog explained how interest rates directly affect home values. As interest rates increase, home values decrease because consumers have to commit more of their monthly budget to pay interest. Some buyers may hesitate to enter the housing market when the interest rates are high. However, because there is no guarantee that they will drop anytime soon, people will continue to make offers.
One of the ways people rationalize this is by saying they can always refinance in the future. Their friends or family members may tell them this too. But what does that mean, and is it always an option? We will examine the refinancing process and explain why it isn’t a guaranteed backup plan.
What It Means to Refinance
Refinancing means changing the terms of your loan. There are several reasons why someone would choose to refinance their home.
- They wish to take advantage of a lower interest rate.
- They want to choose a new type of loan.
- There is also the option to pursue a cash-out refinance and turn equity into a liquid asset (money you can use and spend).
The biggest pitfall people fall into is assuming that the refinancing is a call to their lender. In reality, you will have to go through the closing process again. Your home gets appraised, the lender scours your W2s, pay stubs, bank records, and tax statements to ensure you can afford the loan, and your debt-to-income ratio is within their expected range—and you can expect there to be closing costs. Though these vary, you will likely have to pay 2-5% of the loan amount.
Why Do People Choose to Refinance?
Frankly, because the benefits outweigh the costs, a first-time homebuyer may have selected an adjustable-rate mortgage (commonly referred to as an ARM) without understanding its long-term financial consequences. Are ARMs bad? No, but any type of loan can be bad if you don’t understand its financial implications. People may realize two years later that they made a mistake when selecting their loan.
Although you will have to pay closing costs, you will likely recoup that money if you refinance with a lower interest rate and lower your monthly payments. Another common reason is that people’s financial positions may have changed. Because they are earning more money, they may opt for a 15-year mortgage rather than a 30-year because they will lose less money to interest. Typically, you can achieve this by paying more to the principal without having to refinance, but that may not be the case for some. For most people, there will be no penalty for paying your mortgage off early—but that is not universally applicable.
Speak with a Real Estate Attorney
There are two key takeaways from this month’s blog:
- An understanding and appreciation of what refinancing means.
- That you should be careful when choosing a loan.
Regarding the latter, we understand that you may not read every line of the paperwork you sign, and you may need to fully understand the terms of the loan you are committing to. By having legal representation, you will have someone to do this for you. We will not allow you to be pinned down by an agreement you didn’t understand. Allow us to protect you and your long-term interests. Contact Auricchio Law Offices to schedule your free consultation today.
Auricchio Law Offices
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