A Home Refinance Can Create Special Opportunities.
Over the past decade, an increasing number of home owners have chosen to restructure their home financing, widely known as a home refinance. One significant factor driving this trend has been low interest rates, often at or near historically low levels. Other non-interest rate related factors include the need to replace short term financing, the desire to restructure overall personal debt, obtaining cash for home remodeling, using cash from existing equity for making investments in real estate or other forms of investing, and to use simply for personal reasons.
At PRM, we categorize home refinancing into several categories. Click on the category to view the description.
RATE AND TERM REFINANCE
With a home refinance, you pay off your existing mortgage and create a new one. This can include combining a primary and second mortgage into one new loan. The refinancing process is similar to that of obtaining your original mortgage and you may encounter many of the same procedures and types of cost. Many borrowers choose to finance any closing costs and pre-paid expenses that apply to the refinance so as to minimize out-of-pocket expense while still ending-up lowering their monthly mortgage payment, sometimes by a significant amount. Benefits obtained by the home owner with a refinance include an overall interest expense reduction and/or shifting from an adjustable rate mortgage to a fixed rate mortgage, or vice-versa depending on how long the home owner may or may not be projecting to own the subject home.
When you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment. Doing so is called a cash-out refinancing. You might choose to do this if, for example, you need cash to make home improvement or to pay for a child’s education, purchase a new vehicle, or simply to put away funds for retirement.
Home equity is the dollar value difference between the balance owed on your mortgage and the value of your property. A cash-out refinance is about tapping into that equity so it is important to remember that when you take out equity with a cash-out refinance, you own less of your home. This means that if you need to sell your home, the amount you get from that sale will have been reduced from previous levels.
If you are considering cash-out refinancing, we encourage you to also consider other alternatives including home equity loans or a home equity line of credit. We can help compare a home equity loan with cash-out refinancing to see which is the best choice for you.
FIXED RATE SECONDARY FINANCE
These loans are similar to a first mortgage using a fixed rate and are available in 10 to 30 year amortization options. They are also available as a Balloon Loan product – for example, fixed rate secondary financing can be amortized for payment purposes as if paid over a full 30 year term with a lump sum balance due after 15 years (this is called a “30 due in 15” loan). Unlike home equity lines of credit, fixed rate ‘seconds’ require the full balance be used a inception. These loans can be used in combination with a first mortgage whether as a purchase of refinance transaction. They can also be obtained on a stand-alone basis, independent of a first mortgage transaction. Many consumers choose fixed rate secondary financing when adjustable rates are higher. Conversely, when adjustable rates are lower, many choose home equity lines of credit instead.
HOME EQUITY LINES OF CREDIT
Home equity Lines of Credit, or HELOCs, are adjustable-rate second mortgages with rates typically based on the Prime Index, as reported through the Wall Street Journal. These are unique in mortgage lending in that they serve as a revolving line of credit during the initial draw period and then become a termed out loan at the end of the draw period. These draw periods typically have a duration of five years, most with a renewable option for an additional five years with a 10 to 15 year amortization after that point. During the draw period, the balance can go up and it can go down as the credit line balance is utilized and/or reduced by the borrower. The minimum payment during this draw period is the monthly interest based on the last month’s balance which could be anywhere from a zero balance up to a balance of the full line of credit limit.
A home refinance can create special opportunities that have benefited many homeowners. Contact us for a no charge, no commitment consultation to learn how one might benefit you.