Refinancing can give you much-needed room in your budget or free up cash for investments besides your home. There are a lot of potential gains to be made with a carefully considered home refinancing, but the process can be tricky and isn’t for everyone.
Read on to find out what you need to know to be prepared to make the best decision possible regarding home refinancing.
What Is Home Refinancing?
Typically, home refinancing means taking out a loan for the remainder you owe on your existing mortgage. Depending on the amount you’ve already paid on the house and your current credit score, this can mean much more favorable terms.
But, before making a weighty financial decision like home refinancing, you should take the time to consider what’s involved, as well as weigh the pros and cons.
How Can I Benefit From Home Refinancing?
There are a lot of reasons a homeowner might choose to refinance. These include:
- Lower APR
- Lower Monthly Payments
- Shorter Payment Term
- Converting Equity to Cash
The most common reason for refinancing is reducing monthly expenses. A lower monthly payment means freeing income for other areas in the budget. This is especially valuable for people who suddenly or unexpectedly find themselves with a reduced income.
Some borrowers might be looking to cash out equity for strategic reinvestment. Another approach aims to shorten the loan payoff period without significantly increasing costs by taking advantage of a better APR.
Because the process takes some time, refinancing allows a period in which the borrower has no obligated payments. This can be as long as sixty days, which allows some borrowers to save an emergency fund when they would otherwise be obligated to make payments. Or, they may need the time to recuperate from unexpected financial hardship.
While there are potential advantages, there are situations where refinancing may not be optimal.
When Home Refinancing Isn’t Ideal
Refinancing isn’t free. Just like with a regular mortgage, there are associated closing costs. In addition to title services and a new lender’s policy, expect to pay for:
- Credit reports
- Attorney services
- General administration
This can vary dramatically based on your location and services used, but expect to budget around 5000 dollars for associated fees.
Be wary of “no-cost refinance” offers, as many times the fees are simply included in the final closing terms. Be sure to do your due diligence and compare actual rates and terms. If your closing costs are not covered by over-time savings in your new terms, refinancing may not be a good long-term decision.
If you are going to refinance, it’s a good idea to make it a part of an overall financial strategy. If better terms will free up income, be sure to have a plan on how to use those funds effectively. Also, if that income is targeted toward managing other debts, establish a budget to avoid recurring debt in the future. Careful financial management is necessary to make the most of any equity you’ll have access to after refinancing.
If you feel like you’re ready to pursue refinancing, one of the first things you’ll need to consider is your title insurance.
Do I Need a New Title Insurance Policy to Refinance?
Yes, a new lender’s title insurance policy is generally necessary at both the time of your home purchase and anytime you refinance your home.
A lending institution’s priority is the protection of the loan against risk. Lender’s title insurance protects the lender’s interest on your property and against defects or fraud related to your title and is typically required as a condition of your loan.
Title Insurance: Owner’s Policy vs. Lender’s Policy
Homeowner’s title insurance is a separate policy from a lender’s title insurance, and only the lender’s title insurance needs to be purchased during refinancing. The homeowner’s title insurance is conditional on your ownership of the property, not on the loan, so it should still be valid from the time of your original purchase.
Ready to Refinance?
If you’re ready to take the next step, Boundary Title and its team of experts are ready to guide you through your purchasing and refinancing decisions. We will walk you through the title insurance process and provide the best options possible. You can even get an online quote today.
This material is provided as a courtesy and for educational purposes only. Please consult your title professional for specific information regarding your situation.