Refinancing a home is when a person wants to reevaluate the price of their home and the current mortgage rate that they pay. Refinancing a home is typically performed by homeowners whose credit score and financial situation have increased since they first bought the home, or by people whose home increased in price and they want to cash out a portion of their home. While both of these scenarios seem like good decisions, the ultimate choice to refinance a home has some variables attached to it.

Refinancing a Home for a Better Monthly Payment

One of the main reasons a person may want to refinance a home is to obtain a lower monthly payment for their mortgage. When a loan company decides on a monthly mortgage rate, they will take into consideration some variables. Job stability, age, credit score, and other items are taken into account so that the lender can create a mortgage rate. If a person's credit score is low when they go to purchase a house, their loan rate will typically be higher. This is because the loan is riskier, and the lender wants to ensure they are compensated for the risk factors involved in lending money to this person.

However, as people settle down, get promotions, and obtain a higher credit score, someone who created a mortgage five years ago may want to refinance his or her home to get a better mortgage rate. With a higher credit score and a more developed job history, lenders are more likely to trust that you are a safe investment. Since the investment is safe, the lender is willing to put a low mortgage rate to make some guaranteed money off of your loan. While refinancing a home to lower a mortgage can be a good idea, the person who is refinancing must decide if they are planning on staying in that home for a couple of years. If a person refinances a home and ends up moving in a year or two, then the process of refinancing will likely cost them money due to the associated fees. However, if the person is staying for five or more years, then refinancing a home can be well worth the investment. Therefore, you should always discuss a decision to refinance with a real estate attorney. They can help someone decide if he or she will come out ahead by refinancing his or her home.

Refinancing a Home to Cash Out on Equity

Typically speaking, investing in property is safe. Homes often increase in price over time, which means the equity rises with it. When a person buys a house, they lock in the price of that home at the time of purchase. Imagine that the next week after the purchase, the house is worth 10% more than when the person bought it. This price increase means the home's equity is worth 10% of the home's value. When a home jumps in value over a couple of years, a homeowner can refinance their home to "stay in debt" to the loaning company.

While this may seem like a poor decision, refinancing a home has a couple of benefits. First, refinancing a home "locks in" the price of the home when it is refinanced. The bank will give the homeowner the money that the house is worth at the time of refinancing, and the person will continue to owe money to the bank. Typically, when a person refinances their home and pulls out the equity, he or she can secure a lower mortgage rate due to the higher price of the home. Additionally, the equity that is "cashed out" to the owner can be used for other investments like buying another property, paying off credit card debt, or getting rid of student loans. Moreover, the money earned through refinancing may be tax deductible. Therefore, refinancing a home may keep a person "in debt," but also allows them to use the money to make other investments.

However, just like refinancing for a better mortgage payment, refinancing to cash out equity may not be especially helpful for certain individuals. You should talk about any decisions to refinance a home with a real estate attorney!