Buying a home is a big investment, but what do homeowners do if they want to reduce their mortgage payments or pay off their homes faster? One simple answer lies in refinancing a home. Refinancing allows homeowners to reduce the amount they pay each month on their mortgages, or to pay off their mortgages a lot faster. In addition, refinancing their homes allows homeowners to take advantage of any equity they have built up.
According to a 2017 Gemworth Mortgage Insurance report, first-time homeowners bought on average 1.8 million homes per year between 1994 and 2016. In fact, even though the number of first-time homebuyers fell by 43 percent during the 2008 housing crisis, this demographic led the way when it came to the housing market recovery.
Once a first-time homebuyer has bought a home, what are their options when it comes to refinancing? Here are the benefits and what to look out for when refinancing a home as a first-time homeowner.
Can First-Time Homeowners Refinance Their Homes?
Operating through the U.S. government, the FHA has a first-time homeowners program. Through this program, the agency insures loans from approved lenders, making it easier for first-time homebuyers to get a loan. While there are some restrictions, the program provides an easy path for those looking to purchase their first homes.
Owning a home does have many benefits, one of which is the ability to refinance an existing mortgage, even if you are a first-time homeowner. But before jumping into a refinance of a home, homeowners need to take a look at the benefits and drawbacks of refinancing their homes.
Benefits of Refinancing a Home As a First-Time Homeowner
Refinancing a home usually takes place years after the home is purchased, especially since most lenders require at least four to six months after purchasing a home before they allow homeowners to refinance.
Fortunately, there are many benefits when refinancing, including the following:
The main benefit that homeowners seek when refinancing is the ability to get a lower interest rate on their home loans. This reduces the overall amount that homeowners end up paying for their homes, either each month or over time (depending on how long the loan is refinanced for).
Another benefit of refinancing is the ability to pay off a loan faster. Ideally, a homeowner will owe less on their home at the time they refinance thanks to a lower finance rate. This usually reduces the amount they end up paying over the length of the loan, especially if they opt to refinance from a 30- to a 15-year mortgage. While the monthly payment will likely be higher in this case, the amount owed over the loan’s lifetime will be reduced significantly since it will be paid off more quickly.
Homeowners can also refinance into a different type of loan. An example of this is refinancing from a variable-rate loan to a fixed-rate loan.
Drawbacks of Refinancing a Home As a First-Time Homeowner
Refinancing a home loan can save you money, but there are also some drawbacks to doing so. While the decision to refinance a home is ultimately up to the homebuyer, they should keep the drawbacks in mind when doing so.
The drawbacks to refinancing a home mortgage include:
When refinancing a home loan, homeowners have the option of changing the home’s occupancy status from a main home to an investment property. Homeowners should keep in mind that changing it to an investment property could mean they have to repay any tax credits they received when initially buying the home.
When attempting to refinance a home, homeowners might also fail to recoup any application fees if they are denied.
In addition, many home refinances require homeowners to pay for a home inspection and associated fees. Homeowners might not recoup these fees, depending on what they do with the property following a refinance.
Repayment penalties also might apply if a homeowner refinances and pays off their loan early. If a homeowner feels that they must refinance and there is a penalty for early repayment, then they can always ask their lender to wave any prepayment penalty.
The biggest question a homeowner should ask when refinancing is whether they are actually saving any money. If the answer is no, then they should avoid refinancing their home. Otherwise, a home refinance is a great way to reduce the costs of a home loan, to use any equity in the home, and to pay a home off faster.