Understanding the Risks of Refinancing for San Diego Homeowners

Getting a mortgage can be a whirlwind of information. As a result, San Diego homeowners often find themselves wanting to refinance down the road.  

Refinancing can be great for a San Diego homeowner but it can also cause more problems than it fixes. Do not jump into refinancing without researching the best options.  If it is the wrong time to refinance a homeowner will end up in a worse financial situation than before.

Understanding Home Equity

The home equity that a San Diego homeowner has is the amount left on the mortgage subtracted from the current market value of the property.  As the homeowner pays more on the mortgage this will help to reduce the amount owed and increase the amount of equity that they have in the property.  Since equity is based on the market value of the San Diego home this can increase or decrease according to the current real estate market.

Refinancing

People often think that refinancing is easier than getting a mortgage. But it is the same process. 

During the refinancing process, a San Diego homeowner is applying for a new loan, just with better terms.  That means they will need to provide everything that they gave to their lender at the beginning of the mortgage process.  All updated financial documents will need to be given to the lender for review.

The San Diego property will need to be appraised again to see if the value has increased or even decreased.  This will help the lender decide if the homeowner can still provide payments for the mortgage.  

Closing costs will need to be paid again which can be another two to seven percent of the mortgage total. However,  there is an option to avoid this by paying a larger interest rate by using a no-cost refinance.

Why Refinancing can be Good

The reason many people try to refinance is to get a better interest rate on their mortgage.  Lower interest rates mean lower payments. Overall, they will pay less in interest payments at the end of the loan.  Most San Diego homeowners increase their credit score and work on paying down their debts after getting a mortgage so they can qualify for better interest rates if they refinance.

Changing the type of mortgage can help a homeowner, as well.  Some who chose to get an adjustable-rate mortgage might want to move to a fixed-rate mortgage.  Or they simply want to pay off their loan sooner and want to take a thirty-year loan and change it to fifteen or even ten years. These are all ways to help a San Diego homeowner save money in the long-run.

At the start of a loan if a homeowner did not have a down payment of twenty percent, then they are paying private mortgage insurance.  Once they are past this point they may refinance to get this added fee taken off their mortgage. This can help mortgage payments decrease significantly.

Home Equity Loans and HELOCs

A San Diego homeowner may choose to refinance their loan and use a home equity line of credit, or HELOC.  A home equity loan allows a homeowner to borrow a set amount against their home and then make monthly payments.  Meanwhile, a HELOC is used like a credit card where there is a limit that can be used but payments are only needed on what is borrowed at that time.

There are many options for refinancing on a mortgage.  San Diego homeowners often refinance in an attempt to lower their monthly payments, to get rid of PMI, or to get a lower interest rate.  Sometimes it is best to change the loan terms to avoid making larger interest payments through the life of the loan. Study the loan terms carefully and be sure the refinancing will help the financial situation instead of hinder it.