Financing is a complicated subject. Refinancing, even more so. But if you have a few questions about refinancing, this will hopefully point you in the right direction. If you are new to the world of refinancing, here are a few things you are probably going to want to know:
What Is Refinancing, and What’s the Catch?
As intuitive as it sounds, to refinance is to finance again, this time, with better terms than you had the first time. Why you would want to do this is obvious – the real question is, why would the bank want to allow you to refinance with better terms when they already have you on the hook for worse? Your instincts are quite correct. Banks are not disposed to giving you a better deal for no good reason. So the really real question is, what’s in it for them?
Here’s the deal: Banks also have to borrow money. They are beholden to government regulations. Then, there is the Federal Reserve, which few people understand in the first place. When you put all that in a blender, you get something semi-understandable. If the bank gets a lower interest rate on their loans, they can offer you a lower interest rate and still make the same profit. If they don’t give you the lower interest rate, some other bank will. The thing you can know for certain is that they are not losing money on refinancing. They are just retaining customers.
The downside is that you are ultimately increasing the total amount of your loan. You are just decreasing the monthly payment on that loan. That can be a good deal. Or it can be a bad one. It depends on a number of factors. Here are a few:
Consider Your Advantages
In the Hunger Games, there is the phrase, “May the odds be ever in your favor.” While the odds were never in their favor for the characters in the story, they might be in yours depending on what advantages you bring to the table. If you are a vet, you might want to look into something like the Lowvarates.com VA Streamline Refinance Loan. This company specifically caters to helping veterans with their mortgages. For those people who have this option open to them, refinancing is almost certainly a better deal than for those without it.
Everyone wants free money. But we all know there is really no such thing. So before accepting one of those refinancing offers, you have to make sure you are doing it for a good reason. If you are doing it to pay off high-interest loans, or do a home improvement that increases its value, or pay for a much needed surgery not covered by insurance, those are probably good reasons to reset your pay-off date for another 30 years. But if you are doing it to take a vacation, buy a boat, or the latest iPhone, you are doing yourself a disservice.
It Depends on the Numbers
Refinancing is a matter of simple math made complicated by large numbers, and a long period of time. The good news is that there are mortgage calculators to do the heavy lifting for you. What you have to do is your due diligence. In other words, run the numbers. Do the math. Are you adding 10 years and as many thousands of dollars to your loan for the sake of saving $10 a month? That simply does not add up. So make certain that the benefits really are there before signing the dotted line.
We didn’t even get into points and fixed versus variable interest rates. But this is only an introduction to the subject. The thing to remember is no matter how fun and easy the marketers make it sound, this is a serious financial matter that definitely benefits them, and only might benefit you. Do your homework before signing on the dotted line.