The world of finance, high and low, is a sophisticated place. Understanding its nuances save the amateur financier thousands if not more. Many people choose to refinance their home in order to save money or pay down existing debts. Here are a few things to look out for when you refinance:
1.) Lenders wary of previous cash-out refinances
Lenders may not approve you for another refinance if they see you drew on equity to pay for other things besides reinvesting in your home. In the refinance world, this is called a cash-out refinance, and that simply means you used the cash like a line of credit to pay for things like college or pay down credit cards. However, it can be indicative of poor spending habits—something creditors are always watching out for.
Lenders typically have a 6-month ‘seasoning’ period (sounds delicious, right?) before they will let you refinance with rate and terms that are advantageous to you.
2.) Ask yourself, ‘how long before I break even?’
Refinances cost money. You need to calculate how long it will take for you to recoup the money you spent to refinance from the monthly savings you got refinancing.
This is easy to calculate: Cost of refinance/monthly savings. If your refinance cost you $1800 and you are saving $40 a month, that’s 1800/40, which equals 45 months until you break even on the deal. If you refinance anytime again before that 45-month period is over, you will lose money on the deal.