What Happens to the Equity in Your Home When You Refinance?
When you’re considering your first refinance mortgage, you’re full of questions. How much will this cost me? Is it really the right move? What even happens to my equity during this transaction? The good news is that it probably won’t cost as much as you think, but the equity in your home is affected by the type of refinance mortgage you choose.
Mortgage Refinance 101
So you think you want to refinance, but you’re not really sure what happens to your equity in all this paper-pushing pandemonium. The answer, as it usually is, is that it depends. It depends largely on what you want to happen to that equity.
There are usually three basic scenarios:
Mortgage Refinance Scenario 1
You have a straightforward traditional mortgage refinance. You initially paid $300,000 for your home, which appraised at $305,000 for your refinance loan. You’re looking to borrow $250,000, or about 82 percent of your home’s value, to pay off your existing mortgage because you wanted better terms. You still retain about 18 percent equity.
Mortgage Refinance Scenario 2
You’re doing a streamline mortgage refinance. This is the same house that you paid $300,000 for a few years ago, but since you’re doing a streamline you weren’t required to have it appraised, so you chose to skip that added expense. You’re still borrowing $250,000, but since you don’t have an updated appraisal, you’re retaining the same $50,000 in equity that you started the transaction with. You don’t know that it would have appraised higher, so that $5,000 from the first scenario doesn’t enter into the picture.
Mortgage Refinance Scenario 3
You’re looking to cash out and refinance. That house that you bought for $300,000 and then appraised for $305,000 has enough equity to let you cash out a bit and refinance your old mortgage. The lender will let you borrow up to 85 percent of the value of your home, or $259,250. You tell them to show you the money, so they send $250,000 to your old lender to pay off your old mortgage and cut you a check for $9,250. Presumably, you use that check for something very adulty, like new kitchen cabinets, and not a giant inflatable arm-flailing tube man of your very own.
Obviously, these are very simplified examples. There are closing fees to pay, either by rolling them into the loan or by writing a check. Where does your equity go? It goes where you want it to go. It goes with you, it goes into your pocket, or maybe it does both.
How Should I Use the Savings from Refinancing?
One of the biggest mistakes homeowners made before the real estate market came crashing down a decade ago was taking their equity for granted. They often refinanced their homes in order to take lavish vacations or buy luxury goods when they needed to treat that equity more like a piggy bank for the long term.
That’s part of the reason that lenders are much more strict now about how much of your equity they’ll let you tap these days. Things are different now, though, and you’re different. You’re worried about your equity and retaining it. Good for you.
If you’re ready to talk about refinancing your mortgage, or you’re just considering a home equity loan, you’ve got friends at Home.Loans. We’re waiting patiently for you to give us something to do besides throwing pencils into the ceiling.