What Home Buying Options are There for New Home Buyers?

If you’re thinking about refinancing your home, even if it seems like you just took out a mortgage in the past few years (or even months), it’s important to know that you have a lot of options. Fortunately, refinancing a home loan is a relatively simple process, but it is common for clients to have a lot of questions. While representatives will answer everything, they have found that there are a few questions that come up pretty frequently.

Does home equity help with refinancing?

The more equity that a homeowner has in their property, the more options they’ll have when it comes to refinancing. This is because refinancing a mortgage is still viewed by the bank as a risk; albeit a small one. A bank will still want to see that a homeowner has some personal stake in the property. While this was done with a down payment during the initial purchase, many mortgage companies will want the homeowner to have some equity in the property during a refinance.

While exact figures can vary, most homeowners will typically need to leave about 10% of their equity in the property in order to refinance. Keep in mind that there are a lot of ways around this, and it is by no means a “rule”. It is typical, however, for a homeowner to be able to only pull out 90% of their home’s value when they refinance.

Keep in mind that a home’s value is not based on the original purchase price of a home, but on its current market price. In many cases, an appraiser will be brought in to determine this price. Recently, a growing number of homeowners are surprised that their homes are worth as much as they are, even if they bought just a few years ago. A hot housing market has caused home valuations to soar, giving many homeowners a lot more equity in their property than they originally expected.

Is getting the equity out of your home same as refinancing?

In order to get cash for the equity in a property, it is necessary for a homeowner to refinance their loan. Essentially, this process writes a brand new mortgage on a property.

During the refinance process, the bank will pay off the existing balance on a home, then write a new loan to the homeowner for this amount plus whatever amount of cash they want to take from the home. As long as this total amount is less than the current value of the house, the loan can usually go through with relatively few problems.

If you’re not interested in taking cash out of your property, there are refinancing options that will only remortgage the debt you already have. These loans can be used to get you a lower interest rate or stretch out the payments you have left on the loan. Often, these options alone can save homeowners hundreds of dollars a month. For some homeowners, this is a great way to save money each month without taking on any additional debt.

Of course, determining how much equity is actually in a property and how much you could save each month by refinancing can be tricky. There are dozens of options available for most homeowners once options such as loan term and interest rate are factored in.

What happens to equity when you refinance?

If you do decide to pull some of the equity out of your home, the possibilities of what you can do with the money are endless. However, there are a few options that are strongly encouraged for you to consider.

Home improvements – Not only do home repairs or improvements help to increase the value of your home, but they can also make the loan tax deductible as well. Making improvements to your property can extend the amount of time your family can live in a home, which is often a much cheaper option than moving to a new place. For these reasons, home improvements are one of the most popular uses for home equity loans.

Investments – Purchasing an annuity that can provide lifetime income throughout retirement is an increasingly popular option for many customers. When done properly, it is possible for the money you pull out to be used to make the monthly payments on the new mortgage and provide you with extra income.

Pay off debt – If you have consumer debts such as student loans or credit cards that have higher interest rates than what is currently being offered for home equity loans, you’ll save money every month by using your home equity to pay off these debts. This has the potential to free up hundreds of dollars in your budget.