A house is a real estate contract an investor enters into to purchase the rights of ownership, possession and use of residential property in return for paying the seller agreed-upon price over time. The buyer typically has a choice between placing down payment on the front end or financing to pay off his home loan later. Let’s explore this issue further:
Is it better to buy outright – using cash? The biggest reason why that’s not necessarily true, is because when you put little or no money down on your new house, you will have to pay Private Mortgage Insurance (PMI). An additional reason cash isn’t always best is because if you need to borrow against your equity at some point, chances are you’ll get a lower interest rate and save money in the long run purchasing with a loan.
What about buying with a loan, is that always better? Not necessarily. When you finance your home, you have to make payments (interest and principal) to the bank or other financial institution that is loaning you the funds used to buy the house. You also typically pay PMI as well. There are several advantages by financing instead of paying cash: there’s no need for PMI, if rates drop any lower on fixed rate mortgages; then borrow more for low interest rates; or refinance your current mortgage at even a lower rate.
The last option is called refinancing . This means taking out another loan against your existing house and property – effectively using it as collateral for the new loan. The main advantage of refinancing is the chance to save on interest costs and, potentially, get a lower monthly mortgage payment. Whether it makes financial sense for you to refinance your home depends on several things:
1. How much money can you cut off what you owe? This is called reducing your principle or payoff , and it reduces the amount of interest you’ll ultimately pay over time so will improve the “real” cost of financing your home in the long run. Of course, if rates are low enough that refinancing would only reduce your outstanding balance by 20% – 30%, then there’s no point in refinancing.
2. What kind of deal can you get with different lenders? Some lenders offer better rates and terms than others; 3. Can you qualify for a new loan? If the answer is “no,” then refinancing probably isn’t an option.
There are several options available to someone looking into refinancing their home mortgage, including: saving on interest costs over time with a better rate, borrowing more money and paying off other debts (called Debt Consolidation ), or taking advantage of current low rates by making over the term of your existing loan. The last choice is called extending your mortgage , where longer repayment terms means lower monthly payments . It’s also possible to consolidate several or all of these options together simultaneously . That way you can reduce your principle and debt while reducing interest costs and lowering monthly payments – getting everything in one swoop.