My parents recently suggested I refinance my home to help with some of my debt, but how does that help/work?
I bought my house in 2020 for roughly 275,000 its current market value is close to 400,000. From my understanding I can use the difference in value to help pay for the loan, but how exactly does that work? And how do I go about it?
In: Economics
What’s your interest rate!?!? What your parents recommended might have worked in 2020 on a home purchased in 2015 as rates fell, but now it’s probably not a good idea. Rates in 2020 were typically in the 3% range, and now they’re over 7%.
Re-financing is getting a new lender to pay off your current loan, and issuing a new mortgage you begin paying. This is typically done to lower your interest rate and lower your payments as a result.
And if you need more money (say you want to remodel the kitchen), you can do a “cash out” refinancing where you take out a mortgage larger than the current amount owed to pay off your old mortgage, so long as it’s under 80% of the current home value. Let’s say your original loan was for $247.5k (10% down) and still owe $200k on your mortgage. But you could borrow up to $320k, so you could pull out $120k in equity if you wanted, but you’d have a bigger mortgage payment on the $320k loan than on your previous, smaller mortgage.
But I suspect your interest rate you currently have is WAY lower than a new loan would be, and your payment would skyrocket if you refinanced. Like it could double between the larger amount and higher interest rate.
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