What happens if I refinance my house?
Whether you lose equity in your home when refinancing depends on the original loan amount and how much you refinance for. Most lenders like Altitude Home Loans allow you to cash out on any principal amount when refinancing. If you choose to do so, you'll lose up-front equity.
- You'll have to pay closing costs.
- You might have a longer loan term, adding to your costs and delaying your payoff date.
- You could have less equity in your home if you take cash out.
- You might need to deal with borrower's remorse if rates drop substantially after you close.
Whether you lose equity in your home when refinancing depends on the original loan amount and how much you refinance for. Most lenders like Altitude Home Loans allow you to cash out on any principal amount when refinancing. If you choose to do so, you'll lose up-front equity.
In addition, refinancing when your home value increases can work in your favor. If the appraisal shows your home value has gone up, you may be eligible for a lower interest rate or be able to get more cash out in a refinance.
- Failing to do your homework. ...
- Assuming you're getting the best deal. ...
- Failing to factor in all costs. ...
- Ignoring your credit score. ...
- Neglecting to determine your refinance breakeven point.
In a cash-out refinance, a new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash. You usually pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate-and-term refinance, in which a mortgage amount stays the same.
Refinancing allows you to lengthen your loan term if you're having trouble making your payments. The downsides are that you'll be paying off your mortgage longer and you'll pay more in interest over time. However, a longer loan term can make your monthly payments more affordable and free up extra cash.
If you opt to have the closing costs rolled into the new mortgage, you're augmenting the mortgage balance — the amount you owe — and thus diluting your equity — the amount you own. Similarly, a cash-out refinance can impact your home equity.
Generally, the amount you can borrow with a cash-out refinance is capped at 80% of your home value. However, this can vary depending on the lender and loan type you choose.
HELOCs are generally the cheapest type of loan because you pay interest only on what you actually borrow. There are also no closing costs. You just have to be sure that you can repay the entire balance by the time that the repayment period expires.
Does refinancing require an appraisal?
You'll typically need a home appraisal to refinance your mortgage, both to confirm your home's value and to set your new loan amount. If your refinance appraisal comes in too low, though, you may not be able to refinance unless you use a streamline (no-appraisal) refinance program.
Most lenders require a credit score of 620 to refinance to a conventional loan. FHA loans have a 500 minimum median qualifying credit score. However, most FHA-approved lenders set their own credit limits. Rocket Mortgage® requires a minimum 580 credit score to qualify.
When you refinance, you are required to pay closing costs like those you paid when you initially purchased your home. The average closing costs on a refinance are approximately $5,000, but the size of your loan and the state and county where you live will play big roles in how much you pay.
However, not having enough equity in your home can make refinancing risky, especially if you do plan to take out home equity loans. Most lenders want you to have a reasonably low loan-to-value (LTV) ratio before they'll consider refinancing your mortgage.
Key Takeaways
Refinancing risk refers to the possibility that a borrower will not be able to replace an existing debt with new debt. Any company or individual can experience refinancing risk, either because their own credit quality has deteriorated or as a result of market conditions.
Conventional refinance: For conventional refinances (including cash-out refinances), you'll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent).
In the most simplistic explanation, the balance stored in your redraw facility is transferred to your new loan when you refinance. You will still have access to the funds you have accumulated in this facility, but now you might have to pay a slightly higher interest rate on the amount that you have drawn down on.
Refinancing doesn't reset the repayment term of your loan, but it does replace your current loan with a new loan. You may be able to choose from different offers for your new loan depending on your goals, including a longer or shorter repayment term.
Some borrowers are able to reduce the term of their loan by refinancing. If you are a borrower who has had your loan for a number of years, a reduction in interest rates can allow you to move from a 30-year loan to a 20-year loan without a significant change in monthly mortgage payments.
Legally, there isn't a limit on how many times you can refinance your home loan. However, mortgage lenders do have a few mortgage refinance requirements you'll need to meet each time you apply for a loan, and some special considerations are important to note if you want a cash-out refinance.
How long does it take to refinance a house?
A refinance takes 30 to 45 days to complete in most cases, but it could always require more or less time depending on a variety of factors. For example, appraisals, inspections and other services that third parties handle can slow down the process.
If you have taken out too much equity and the real estate market drops, you can end up losing all the equity in your home. Further, if you have negative equity, the lender may demand immediate payment of the loan.
You get the money in a lump sum, and then you make regular monthly payments for a set period of time until you've paid it back. The loan is secured by your home, so the lender has a legal claim on the property in case you don't pay off the loan as agreed. Home equity loans usually have fixed interest rates.
A home equity loan could be a good idea if you use the funds to make home improvements or consolidate debt with a lower interest rate. However, a home equity loan is a bad idea if it will overburden your finances or only serves to shift debt around.
When you want a cash out refinance using a conventional loan, we can often accept a minimum credit score of 620. When you want a VA loan cash out refinance, we can often accept a minimum credit score of 550. When you want an FHA loan cash out refinance, we can often accept a minimum credit score of 550.
