Over the past couple of years, interest rates on home loans have been historically low and you may have heard a lot of talk about how it was a great time to refinance your home. In today’s market, with interest rates rising, you may hear less about refinancing now and more about buying now and refinance later. If you are wondering, what does it mean to refinance and how will it help me later, we are here to help! 

What is refinancing?

Simply put, refinancing is changing your current loan terms. Common goals for refinancing are to lower one's fixed interest rate to reduce your monthly mortgage payments, change the duration of the loan, switch the type of loan you have, or cash out on your home equity. Many people recently refinanced their homes because of how low the interest rates were. Interest rates play a major factor in your monthly mortgage payments. Having a lower rate can actually save you hundreds of dollars per month which was the goal for many homeowners the past couple of years. 

What does it mean to cash out on your home equity?

Cash-out refinancing replaces your current home loan with a new mortgage loan and allows you to take advantage of the equity you’ve built up in your home. For example, if your home is worth $350,000 and you owe $200,000 on your current loan, your home equity is $150,000. Cash out refinancing means accessing the difference between the two mortgages (your current one and the new one) in cash, or in this example $150,000. The cash can go toward virtually any purpose, such as home remodeling, consolidating high-interest debt or other financial goals. 

Is it a good idea to buy with high interest rates and refinance later?

Yes. House prices have been climbing rapidly over the past couple of years. With the increase in interest rates, price increases have slowed down significantly. This means as a buyer you have more negotiating power when it comes to purchasing a home. While every market and home is different, purchasing a home today is easier than in the previous years. Yes, your interest rate will be higher which means your mortgage payments will be as well, but interest rates change regularly. The key here is to understand that not only do you have negotiation power, you’re also building equity in your home. While your mortgage payments may be a bit higher, your net worth is increasing because you’re building equity. Once you begin building equity in your home, you can begin taking advantage of the benefits mentioned above to refinancing.

When do I refinance after I buy?

The truth is, it depends. There are many factors that go into when is the best time for you to refinance. The best thing to do to help you answer that question is to figure out your home and financial goals and talk with a mortgage lender. The best advice we can give is to always, always, always consult with your lender. Your lender will have the most up to date information on current rates, tax implications, and will know what is best for your financial goals. 

If you’re ready to get started building your equity, we would love to help you with the home buying process. Let us help connect you to a local lender to get the preapproval process started!