December 6, 2018 by Jason C
In Dallas, many people are choosing to refinance their homes in order to benefit their financial bottom line. Refinancing is a relatively simple concept, but it gets more complex when you consider the reasons to refinance coupled with the range of benefits--as well as things you need to look out for—during the refinancing process.
What Does Refinancing Mean?
Refinancing is a way of either reducing your mortgage payments or getting capital by borrowing against the current value of your home. When you buy a home and get a loan to do so, a lender gives you the money to make the purchase. This is done for a cost, which is decided by the interest rate. When interest rates nationwide drop, many people can save money each month by refinancing the amount they owe with a new—or the same—lender. Let’s consider a simplified example.
Refinancing to Lower Monthly Payments
Mark and Janice buy a home in Dallas for $300,000, put 10% down, and get an interest rate of 6.5% when they close the loan. With insurance included, they end up paying $2,284.33 a month. A couple of years later, they feel they can get a better interest rate and decide to refinance. They are able to get an interest rate of 5%. Their monthly payment then drops to $2,001.44 a month. They are now saving about $283 every month because they refinanced their mortgage.
Refinancing to Pay off Your Home Sooner
You can also refinance in order to make it so you pay off your home sooner. For instance, you can switch from having a 30-year mortgage to having a 15-year mortgage. This means you will own your home free and clear much sooner. Also, because you will be paying more towards the principle each month, the amount of equity you have in your home will go up quicker. Equity is how much the home is worth minus how much you owe. As you take bigger chunks out of the amount you owe each month, the amount you owe drops faster.
Refinancing to Get Cash
It’s common in Dallas to refinance in order to get some money that can be used for a number of things. Dallas homeowners do this when they feel their home is worth more than they owe, and they would like to use some of that equity in order to make a purchase of some sort. There are some refinancing arrangements that specifically target home remodeling projects. In a situation like this, the lender takes a look at how much your home is worth and then if there is enough equity in your home, the amount you need for the remodeling project is borrowed. This amount is then added to the amount you owe on your home, and your monthly payments change to reflect the new amortization schedule. An amortization schedule is the list of payments you have to make on a loan.
Some Drawbacks of Refinancing
When you refinance at a lower interest rate, there are few—if any—drawbacks. However, refinancing in order to borrow against the equity of your home is likely going to increase the amount of time you have to make payments on your home. It also may increase the amount of money you pay each month, depending on the interest rate you get. If you were to refinance at a lower interest rate and not borrow against the equity in your home, you could put the money you would have paid towards your new, lower mortgage payments, and chip away at the principle much faster.
There are many options for refinancing in the Dallas area. Either way, you have to decide carefully what is going to be right for you and your family’s short- and long-term goals.
Article was written by: https://rodneyanderson.com/