Refinancing...
A Refi (refinancing your existing mortgage) is very similar in many ways to a mortgage you would use to purchase a new home. The documentation and qualification process is similar. However, there are some substantial differences. For one thing you usually won't need a real estate attorney on a refi.
There are basically two types of refi's:
1. "Rate and Term Refi" is when you refinance the existing mortgage for the current amount owed and are not receiving cash at closing for any reason. Some reasons for doing this type of refi would include lowering your interest rate or lowering your payment.
2. "Cash Out Refi" is when you refinance the current amount owed and you receive cash (over $2,000) at closing for any reason. You might want a cash out refi to pay off debt (Debt Consolidation), home improvement, college education, for investment purposes or just about any reason you could imagine. Whatever you do with the cash out, since it is now part of your mortgage loan, (the interest) is tax deductable.
Important financial considerations of doing a refi:
Is it worth it to refi? First you must determine how long you will have the loan (or stay in the house?).
Then figure your break even point. Do this by looking at the savings vs the costs. What will it cost to do the refi. Total all the costs including lender fees, title fees and any points you might want to pay to lower the rate. Then divide the monthly savings of the refinanced loan into the cost to see how long it takes to break even. Compare the length of time to break even with the length of time you plan to stay in the home.
Important psychological considerations for a refi of any sort:
How long of a term will your refi be vs. how long you have left on your existing mortgage. In other words if your 30 year mortgage has only 10 years left, would you really want to refi back to a 30 year term just to keep your monthly payment low? You might want to consider a 10 or 15 year term for your refi.
While it might seem enticing to do a cash out refi to pay off (higher interest) credit cards, or a car loan you are spreading out the payments over a very long period of time. In essence if you built up credit card debt by buying groceries and christmas presents for the kids, do you really want to be paying for those staples and gifst for 30 years?
Beware:
Cash out Refi's may cost a little more depending on your LTV. However, if your LTV is under 70% there is usually no extra cost.
Important note: Even if you don't take any cash out, but you are paying off an existing second mortgage with the new refi mortgage, if the second mortgage wasn't made at the same time as the first, it is considered a cash out Refi.
Often times it might make more sense to take out a home equity loan (HEloan) or a home equity line of credit (HELOC) to pay down debt or pull cash out of your home's equity. Especially if your first mortgage is at a good rate or has a short term left.
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