Coral Springs couple Ted and Stephanie had credit problems that kept them from refinancing their home the past few years when interest rates were at historic lows. Now their credit problems are resolved and their credit score has rebounded, so they’ve started wondering whether they should refinance their home now.
People refinance their homes for a variety of reasons. One, which is partly what motivated Ted and Stephanie, is to have cash to renovate their home. The couple purchased their charming Florida ranch home more than 20 years ago, and the kitchen was outdated even then. They wonder whether refinancing their home and taking cash out will be a smart financial move for the couple.
The real estate market in recent years was booming for refinancings, as people traded higher interest rates for some of the lowest rates in decades. More recently rates have risen, but they are still low by historic standards. People who didn’t refinance before, or who did so but are wondering whether they might benefit from doing so again, have a lot of questions.
As an experienced real estate attorney in Coral Springs and Parkland, Florida, who has handled many refinancing closings, our law office knows that people have numerous motivations in the decision to explore refinancing. Our real estate attorney’s years of experience helps us offer individualized guidance that supports our clients’ best interests and choices.
This blog answers the question, “why do people refinance their homes in Florida?” and explains the process. Continue reading to learn more, then contact us at (954) 979-6566 to schedule a free consultation to discuss your exact situation.
What is the Purpose of Refinancing?
Every experienced real estate lawyer knows that the purpose of refinancing a home is based on individual circumstances and financial goals. All are valid reasons to refinance, as long as it makes sense financially and that any money taken out during a refinance is used to further teh homeowner’s investment goals. While it might be fun to use your house as a piggy bank to fund some fun vacations, that would take away from the wealth-building opportunity often provided to homeowners.
In more than 25 years of serving clients throughout South Florida–including Boca Raton, Pompano Beach, Deerfield Beach, Parkland, Tamarac, and Coral Springs–our firm has seen all of the common reasons people refinance their home:
- Accessing a Lower Interest Rate: Obviously, this applies only if your current rate is higher than those being offered now, which is not the case for many homeowners. When homeowner rates are above those being offered today, refinancing allows them to lower their interest rate, generally leading to reduced monthly mortgage payments and long-term interest savings.
- Accessing Equity with a Cash-Out Refinance: A homeowner may refinance to access the equity built up in their home, which they can use for various purposes such as home improvements, debt consolidation, or other significant expenses, or for investments or other financial goals.
- Renovation and Remodeling: As is the case with Ted and Stephanie, refinancing can provide the funds needed to undertake home renovation projects, such as remodeling a kitchen, adding an extension, or upgrading living spaces. This may be a wise use of refinancing equity when it enhances not just the comfort but the overall value of the home.
- Debt Consolidation: By consolidating higher-interest outside debts into a new mortgage with a lower interest rate, a homeowner might be able to reduce their overall interest costs.
- Change in Loan Terms: Refinancing may allow a borrower to change the terms of their mortgage, such as switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa, which can offer stability or flexibility depending on the homeowner’s needs.
An experienced real estate attorney generally can point clients towards reputable mortgage brokers or banks. These experts help Florida homeowners get clarity on their specific motivations behind refinancing so they can make informed financial decisions tailored to their unique circumstances and goals.
What Happens When You Refinance Your Home?
When you refinance your mortgage loan, you replace your current mortgage with a new one. Some people remain with the same mortgage lender or they choose a new one, based on who has the most competitive rates, reduced closing costs or fees, quality service and reputations, and the like.
Banks treat a refinanced mortgage loan similarly to the loan they offer when a person first buys a home. This means clients need to fill out forms, submit all relevant income and other information, and have a closing with a closing expert such as an experienced real estate attorney.
An Example of Mortgage Refinancing
Let’s say a person owes $200,000 on their current mortgage, and the rate is 8 percent because they didn’t have good credit when they bought the home and weren’t able to refinance when rates dropped in recent years.
To begin the refinancing, the person identifies a financial institution offering a lower interest rate on that amount, either on their own or using a mortgage broker. After successfully undergoing the application and approval process, at closing the closing agent pays off the previous lender. This means the homeowner owes the new lender their mortgage amount, which should be lower since the interest rate has been reduced. The homeowner subsequently makes their mortgage payments to the new lender.
Does it Pay to Refinance?
If the new interest rate will only be slightly lower than the old rate, it may not be worthwhile to refinance. That’s because refinancing incurs fees, including loan applications and closing costs, similar to when the person got their initial mortgage.
For this reason, Florida real estate attorneys encourage their clients to investigate all their refinancing options with several different institutions, including finding any that may waive or reduce some of the costs, and keep all fees in mind before deciding to proceed.
After all, if your purpose in refinancing is to save money, you don’t want all these extra costs involved in refinancing to wipe out the savings. Of course, this means refinancing at a higher rate is hardly ever a good idea, unless you desperately need the money and a cash-out refinance is your only option.
In general, experienced real estate attorneys and other professionals, including real estate agents and loan officers, recommend refinancing your mortgage only if it lowers your current interest rate by at least .75 to one percent.
What are the Three Main Types of Mortgage Refinancing?
There are three main types of mortgage refinancing:
- Rate-and-term refinance: As the name suggests, people seeking this type of loan either want a lower interest rate or seek to amend the length of the loan (or both). Most people who amend the term seek a shorter, 10- or 15-year mortgage in order to save money on interest payments over the life of the loan. For most people, saving money is the primary motivation with this type of refinance.
- Cash-out refinance: Here homeowners want to cash out on some of the equity built into the home either from rising values or years of previously paying their mortgage. In a cash-out refinance, a homeowner refinances both the remaining loan balance and the additional amount of cash they want to take out. In this scenario, their new loan amount is larger. Interest rates are often higher for cash-out refinances than for rate-and-term refinances.
- Cash-in refinance: In a cash-in refinance, homeowners give their lender money to lower their loan-to-value ratio (LTV), to achieve a lower interest rate or a shortened loan term (or both). This is often done so the homeowner will have 20 percent of equity in their home, the amount needed to eliminate their mortgage insurance premium (MIP).
Advantages and Disadvantages of Refinancing a Home in Florida
Advantages
A Lower Interest Rate Allows You to Save More Money: if you have improved your payment history and credit score, you may be able to qualify for a lower interest rate if your rate is currently high. With a lower interest rate, you can build equity faster and pay much less money over the life of the loan.
Benefit from Your Home’s Equity: When the value of your home exceeds the amount you owe on your mortgage, you can tap into your home’s equity to pay off high-interest debt, costly repairs, home improvements, college tuition, and any other large purchase. This is especially valuable if you also get a lower interest rate on your new loan.
Change the Type of Interest Rate: Change from an adjustable interest rate to a fixed-rate loan for greater stability, especially when establishing a budget for long-term costs. Or, switch from a fixed-rate loan to an adjustable rate mortgage for lower monthly payments initially.
Disadvantages
Payment of Closing Costs: Just as with your original real estate contract and closing, you will have to pay closing costs with a refinance—usually two to six percent of the new loan amount. Closing costs include loan origination fees, appraisal fees, title insurance, credit report fees, and others. Some lenders will waive or reduce some of these fees, but some cannot be avoided.
Cash-Out Downsides: When you cash out on your home’s equity, it usually results in a higher loan amount that you will owe when you sell your home.
Length of the Refinancing Process: Refinancings generally can’t be completed immediately, a problem if a person wants a cash-out loan and needs the money right away. The average refinance takes around two months to complete, depending on the type of loan.
Impact on Your Credit Score: Applying for a mortgage loan drops your credit score several points (multiple similar inquiries within a short span of time, such as if you’re mortgage shopping, usually count as one inquiry). You should initiate this process only if you are serious about refinancing. Then, when researching the best rates, contact a few top choices of lenders in a short time span to protect your credit score.
Do I Need an Attorney if I Refinance a Home in Florida
Just as when you purchase a home, having an experienced real estate attorney on your team when you refinance is a wise thing to do. Problems can arise during the refinance that an attorney can help you with. And refinance loans need to have a closing where all papers are signed just as a home purchase does.
Many attorneys charge the same rates as a title company but you get legal representation from an attorney that a title company without an attorney cannot lawfully provide.
Are You Seeking to Refinance Your Property? Contact the LAW OFFICE OF GARY M. LANDAU, Serving Coral Springs, Parkland, Fort Lauderdale, Boca Raton, Pompano Beach, Deerfield Beach & All of South Florida
With more than 25 years of experience and countless satisfied clients, Gary M. Landau and his team are uniquely positioned to help you with your probate and real estate needs in South Florida. Whether you’re ready to probate a loved one’s estate or to write your own will, or if you are purchasing a home, have inherited a home, or want a closing agent to handle title insurance and all documents for your closing or refinancing, the LAW OFFICE OF GARY M. LANDAU, P.A. is ready to work with you.
Call our office at (954) 979-6566 or complete our online form today to schedule a free consultation. We work with our clients in person, over the phone, or on Zoom.
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LAW OFFICE OF GARY M. LANDAU, P.A.
7401 Wiles Road, Suite 204
Coral Springs, FL 33067
(954) 979-6566
https://www.garylandau.com/