Are you thinking about refinancing your first or second home in Washington State? There are many reasons a homeowner might choose to refinance their home loan, but there are a few things to consider before getting started. The experts at Solarity Credit Union want to make sure you have all the information you need to make the best decision for your financial situation. We’ll look at a number of things to consider before you refinance a second home—or a first one—here in Washington and the five steps to take once you’re ready to move forward.
What does it mean to refinance your home?
“Refinancing a home” is a phrase you’ll see in advertisements and brochures for lending institutions, but you might not have a clear understanding of what it means.
In simplest terms, it means replacing your original loan with a second loan with new, often better, terms. Your new lender uses that loan to pay off the first one in its totality, meaning you won’t need to make payments on the original loan anymore. You start paying off your new loan instead.
Mortgage refinance: 3 reasons why
Homeowners may choose to refinance second or first homes for several reasons. For example, it can be done as part of a debt settlement (often called restructuring) to help homeowners maintain liquidity and keep ownership of their property. More commonly, however, home refinancing is done for one of three reasons:
To reduce the total cost of the mortgage
To refinance their loan to reduce their monthly payments
To have extra cash on hand, usually for a project such as a home improvement
Let’s look at these three reasons through examples of three home refinancing situations.
Refinancing a mortgage to reduce total cost
Albert Einstein once called compound interest the most powerful force in the universe, and it’s not hard to see why. Two families who buy identically priced homes but who have different mortgage terms can wind up paying drastically different total sums over the course of a mortgage’s lifetime.
A general rule of thumb is that there is an inverse relationship between monthly payment amount and total cost; when the former is lower, the latter will be higher, and vice versa. This is because low monthly payments tend to be correlated with longer payment periods, giving more time for compound interest to accumulate.
If you take out a 30-year fixed-rate loan, because your monthly payments are spread out over 360 months, they’ll be fairly small. However, compound interest will be added to the total you pay every month, and if you only ever pay the minimum amount due for all 30 years, interest and principal paid will add up to far more than what you originally borrowed.
But what if five years into your mortgage, your expected earnings increase and you opt to refinance your home loan with a 15-year fixed-rate loan? This will increase your monthly payments. However, because you pay off the loan faster, it’ll accumulate less compound interest, and the total amount you pay in the end will be less than if you waited out the full 30 years of your original loan.
Refinancing to take advantage of lower interest rates will similarly reduce the overall amount you pay.
Refinancing a mortgage to reduce monthly payments
On the other side of the coin, let’s say you start with a 15-year fixed-rate loan. You and your partner are both working full-time, and the higher payments fit easily within your budget. But five years into the loan, one of you decides to return to school full-time, and your monthly income drops substantially. In this case, you can refinance your mortgage with a 20- or 30-year fixed-rate loan. Lengthening the term of your loan will spread repayment over more months and reduce your monthly payments.
Refinancing a mortgage for extra cash
What if you are perfectly happy with your mortgage terms, but you want to make some costly home improvements to your second home and don’t have the liquidity on hand? The best refinancing option in this instance is a cash-out refinance.
In this type of refinanced mortgage, you replace your original loan with one that is larger than the remaining amount you owe. The difference is given to you in cash, and you now have the funds to make improvements or renovations. While you will end up paying more (since you’re taking on a larger loan), you may decide that the ultimate increase in your home’s value will be worth it when you sell, or you might just want to live in a better place.
If you want to play around with refinance rates, check out Solarity’s mortgage refinance payment calculator.
5 steps to refinancing your second home in Washington
Refinancing your mortgage can be a simple and quick process when you work with the right lender. And you’ve probably already completed the first step:
Step 1: Know exactly why you want to refinance. Are you looking to reduce monthly payments or decrease your total cost? Do you want some extra cash on hand?
Step 2: Assess the value of your home. How much is your home worth? If home prices in the area have risen, you may have more equity to borrow against. If you’re looking for a cash-out refinance, consider how much the renovations you’re planning will increase the home’s value.
Step 3: Compare second home mortgage refinancing rates and options and choose your loan. Get quotes from various lenders to see what they’ll offer you. Don’t be afraid to shop around. This is a major decision so you shouldn’t make it lightly.
Step 4: Gather all the relevant documents for your finances and submit your application. These documents will be much the same as those you needed when you first purchased a mortgage (e.g., W-2 forms, pay stubs, bank statements, asset statements, and so on).
Step 5: Close on your refinance and start paying off your new loan. Solarity offers its eSigning Experience for closing, which allows borrowers to close quickly and easily from anywhere with an internet signal.