A house is also an investment, and a refinance could yield better results from it.
Sooner or later, you'll probably think about refinancing your house. Maybe you'll see an ad or hear someone talk about how mortgage rates are down. Or maybe your credit rating will improve so you might qualify for a better rate. But hold on, it's not that simple.
The value of your home plays a big role in refinancing it. It's not just a matter of renegotiating for a better rate. It's also about whether the value of your house can support a new loan.
Refinance your house, and you could save money or even get money back.
Why Think About Refinancing
Refinancing your home could help you lock in a better situation than the one you have now. Maybe your interest rate is higher than you'd like, which makes your monthly payments higher than they would be with a lower rate. Or maybe you bought your house using an adjustable rate mortgage, but you want the security of knowing what your interest rate will always be.
If mortgage interest rates go down, a well-timed refi could help you take advantage of it. And if your credit report improves over what it was when you bought the house, that could also help you get a better rate.
A lower interest rate could save a lot of money over the life of the loan because it reduces the amount you'll pay in interest. It doesn't reduce the principal amount, but it does limit how much the bank will charge you for the use of their money.
Another reason why some people refinance is to enjoy some of the value of their home in the form of cash. Although it's not a hard and fast rule, most real estate is worth more as time goes by. With a cash-out refinance, you could get a new mortgage plus get a check for some of the property's equity. Equity is the value of property above what's owed on it.
It's all a numbers game, so it pays to learn about yours in advance.
How House Values Factor In
The value of your house plays a major role in the type of refinance options you'll have. If property values have gone down, it might not be possible. But if you've owned your home for a while, the value has increased, and your credit history is pretty good, then you stand a fair shot at a refinance. That's because your house is worth more than you owe, and refinancing what you owe for a better deal is less of a risk for the bank.
All mortgages are based in part on the value of the property. The loan-to-value ratio is a determination of risk, explains Investopedia. This ratio is found by dividing the mortgage amount by the appraised value of the house. So a house with a high value and a lower mortgage amount is a lower risk than one where the two numbers are closer together.
An 80 percent LTV ratio is about average, but some banks work with a wider range of possibilities. A higher ratio might be possible, but a lower ratio will likely get you a better interest rate because of the reduced risk. This risk is all based on what your loan collateral - the house - is worth, and whether the bank could recoup its loss if you default on the loan.
Learning the value of your house can help you decide whether or not a refinance is worth pursuing. Bankrate says it's the right first step, and you don't need an appraiser. With a property value estimation, such as the one you can get for free through eppraisal, you'll get a good idea of what your house is worth. Then you'll have a better understanding of how you'll fare sitting across the desk from your lender.
Refinancing a house is not something to be taken lightly. It involves many of the same things as buying a house, such as an appraisal, perhaps an inspection, loan origination fees, and other things that vary by lender.
Learning the estimated value of your house puts you in better control than walking into the bank blindly. If you have a good idea of what your house is worth, you won't have to worry that a lender's appraisal will leave you speechless. And you'll also know in advance whether you're in a marginal category where the decision might go either way, or if your home is worth more than enough to give solid support to a refinance.
You can get an estimation of your home's value in a matter of minutes when you use eppraisal. All you have to do is enter your address, and the next page is filled with information such as what your home is likely worth and the factors that lead to that estimation. Click here for your own free property valuation, and find out whether a refinance might be in your future.