Ask a Seabrook Island Realtor: Should You Be Refinancing?
It comes as no surprise that the primary reason homeowners choose to refinance their mortgages is to save money. Homeowners often believe that they will save by negotiating a lower interest rate, moving from a 30-year amortization to a 15-year loan term, or changing from a loan with an adjustable-rate to a fixed rate. In reality, it often doesn’t end up that way. If you aren’t sure if you are getting the best deal by refinancing, you could end up wasting your valuable resources. Unsure of where to begin your research? Our team of seasoned Seabrook Island Real Estate Agents will help guide you through what you should consider before making any financial decisions when it comes to your home loan.
What You Need To Know About Refinancing
What Does Refinancing Mean?
Refinancing your mortgage means that you are, essentially, paying off your existing home loan and replacing it with a new one. If you choose to refinance, you are essentially restarting your home loan, meaning that it can take years to recoup your upfront investment. Unless you plan to stay in your home for more than a couple of years, it probably isn’t worth taking out a new loan. As with your first mortgage, refinancing requires a title search, application fees, an appraisal, and a percentage of the loan’s principal. Because of these costs and expenditures, it’s essential to thoroughly consider your financial situation before refinancing. As you are doing your research, be sure to take these financial questions into account:
- What is the difference in interest rates?
- How much equity is in my home?
- How much can I reduce my payment?
- How much longer will I live in my home?
- Are the potential savings of a lower payment or shorter-term worth the upfront cost?
- Can I cover the closing costs?
- How long until I break even?
Should I Refinance My Home?
Homeowners are constantly searching for ways to reduce their debt, increase their home equity, and save on, or even eliminate monthly mortgage payments. If you are looking into refinancing your mortgage, whether to obtain a lower interest rate, change the type of loan you have or shorten the term of the loan, here are a few guidelines to help you decide. Generally, refinancing is beneficial if:
- You can lower your interest rate by at least 1-2%, as this will help compensate for closing costs that come with refinancing.
- You plan on staying in the home long enough to recoup the costs of the financial change. Refinancing could allow you to enjoy a sense of financial stability and security in the future.
- You have multiple high-interest debts that you could save on by consolidating into a refinanced mortgage loan. Keep in mind that the most valuable refi loan is one that allows you to both lower your mortgage rate and shorten your loan terms!
- You could get a better loan by renegotiating for a longer or shorter-term mortgage loan, depending on your financial situation.
For example, 30-year term mortgages are common because they are often more accessible and affordable month-to-month. These terms allow you to make smaller payments over a longer period of time for more financial flexibility. With a longer-term loan, you will pay less in principal each month but more in interest, whereas with a short-term loan, you will pay more in principal each month but less interest over time. Make sure to consider which of these types of loan terms best aligns with your financial goals before renegotiating.
Can I Refinance My Vacation Home?
Recently, we have seen dramatic drops in interest rates for refinancing as a result of the ongoing coronavirus pandemic. In combination with a booming real estate market, these rates have prompted a record number of second-home sales. If you have refinanced your primary residence, you will see that refinancing a vacation home has a slightly different process. Still, many homebuyers are now looking to refinance their second homes to lower interest rates, shorten their loan terms, or cash out.
Lower rates have made it easier for second homeowners to get qualified for refinancing, and this year is a great time to get a new loan. As long as your rental income from the property isn’t used to qualify for the loan, and you continue to occupy the property as a second home, you are eligible to refinance your second home’s mortgage with the Fannie Mae program.
Refinancing a Vacation Home vs Primary Residence
Fannie Mae considers second homes worthy of rates similar to your primary residence, so you shouldn’t expect to pay much higher mortgage rates. While some lenders may increase mortgage rates and fees for vacation homes, especially when it comes to private mortgage insurance, these fees typically aren’t large expenditures.
Unlike primary homes, vacation home loan-to-value (LTV) maximums are more limited by lenders, requiring you to have more equity in the home. This is even more true if you are looking to cash out with your new loan. Second homes are considered higher risk than primary residences, so you will need a higher credit score to refinance. This is because homeowners are more likely to pay their primary mortgage than their secondary.
If you are thinking of refinancing your vacation home, keep in mind that lenders will want to see that you have enough funding to cover payments in the event of financial hardships or emergencies. Lenders will expect to see full payments, from the most recent two months, for all of the home’s expenses, including principal, interest, taxes, insurance, and HOA or membership dues.
You will also likely need to prove your assets on other financed properties besides the primary home. For example, if your vacation home is your only additional property and has a mortgage payment of $1,100 per month, you will need to verify at least $2,200 in your account. Bear in mind, the more properties you have, the more financial assets you will need to verify.
Even if you aren’t currently looking to refinance your home loan, our Seabrook Island Realty team is more than happy to help you with any of your real estate needs! If you are looking to take advantage of the flourishing real estate market by purchasing a home on Seabrook Island, browse the available listings we have on Seabrook Island or reach out to one of our agents to learn more.
Seabrook Island is Charleston's only Truly Private Ocean Front Community. Membership in the Seabrook Island Club is required for ownership. Amenity use is for Members and their Guests Only.
The Lakehouse is for use by Property Owners and their Guests as well.