Refinancing your mortgage is a great way to finance improvements on your house or property. Before you even start your refinancing process, you need to first have an outline of all the home improvements you want to make. Whether roofing repairs, a new kitchen, or a bathroom overhaul, your plan should include your estimated costs for the improvements as well as the value that you expect the improvements to add on the price of your home.
Home improvements can be very costly which is why a lot of homeowners look at refinancing as a means to finance them. Mortgage refinancing is a process that involves taking out a new mortgage loan to supplant an existing one. Borrowers typically look for refinance mortgage for the following reasons:
- Mortgage rates have fallen
- The borrower wants to change their mortgage type
- The borrower wants to reduce the risk of their home loan
- The borrower wants to finance improvements on their house or property
Currently, many borrowers are choosing to refinance into 15- year loans as interest rates are at extremely low levels. Last week, the national average for the 15-year fixed was reported at 4.20%, the lowest on record according to Freddie Mac. Many of the same costs and procedures that are typically undergone with a first mortgage apply when obtaining a refinancing. Eligibility rules and criteria such as a favorable credit rating, stable income and a low debt-to-income ratio are extremely important in the eyes of lenders.
Closing costs and related fees are definitely important things to keep in mind when deciding whether to refinance. A typical refinancing will cost somewhere around 4-6% of the loan amount with much of the expense consisting of closing costs. To actually benefit from refinancing, one must stay in his/her house long enough to reach the “break even” point. This is the point where the money that you save in monthly interest payments covers the total upfront costs of your refinancing. The larger the spread is between your refinanced rate and your existing rate, the shorter your break-even point. Therefore, it is usually not a good idea to refinance if:
- You have a low balance on your current mortgage
- The value of your home has gone down
- If you have already used up a substantial amount of equity in your home
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