Applying for a mortgage is a significant decision you have to make. The thought of moving to a new home combined with the responsibility of it can easily overwhelm the unprepared. After all, a hefty amount of money and your credit reputation is on the line.
However, a mortgage payment can be a pain to pay. Because of this, some people turn into mortgage refinancing to ease up their monthly payment. Not only does it lower the interest rate compared to their current mortgage, but it will also help them save more money in the long run.
What is Mortgage Refinancing?
Mortgage refinancing is the method of having to pay off an existing mortgage and replace it using a new loan. Most of the time, the fees that come with mortgage refinancing are combined with the loan. This means that the costs are added to the existing loan balance, thus increasing the loan amount. However, your equity might decrease if your loan balance increases.
By refinancing, you can reduce your mortgage's monthly payments or lower your interest rates. You can also refinance to take out money from your home during large purchases or change mortgage companies. Some people refinance when the house they are paying has equity.
When Should You Consider Mortgage Refinancing?
Just because you can refinance your mortgage doesn't mean you should do it. It is not always the best idea and might cost you more money than before your refinance.
Lower Mortgage Rates
There are a variety of reasons that can influence the mortgage rates to go down. If the rates fall, you can secure a lower interest rate compared to your existing mortgage loan. This way, you can save more money. Called rate-and-term financing, this method allows you to refinance your mortgage for a loan with lower interest while still keeping the same remaining term.
However, it is essential to remember that you shouldn't immediately refinance just because the rates had fallen. Financial experts advise that you should only refinance if the rate is at least one or two percent lower than your current rate.
Home Equity Increase
Home equity is the money you would get if you sell your home after paying off the mortgage. If your home's worth went up, refinancing will give you great benefits and might help you pay off other debts with high-interest.
Cash-out refinancing is done by replacing your existing mortgage with a larger mortgage. You will receive the difference in cash. This is an excellent alternative for a home equity loan. Say, for example, if your home has a fair market value of $250,000 and you owe at $200,000 on the mortgage, then that means the equity you would receive is $50,000. This is assuming that you have sold your property for fair market value.
With this method of refinancing, remember to always use the money responsibly while avoiding getting yourself into unsustainable debt. It still is a part of a loan, so you have to pay it back along with your mortgage.
You're on ARM while Mortgage Rates Have Gone Up
If you've managed to get an adjustable-rate mortgage or ARM as the mortgage interest rates rose, refinancing and shifting to a fixed-mortgage rate would be beneficial to you. Because of ARM, your monthly payment might go over your fixed-rate mortgage. Fixed-rate mortgages can help ease your mind about interest hikes in the future.
This is an excellent move for most homeowners. However, it should only be done if you plan to stay for a very long time in your current home. Study your ARM terms carefully and make sure what index it is connected to, the frequency of your loan adjusting, and the caps on the loan adjustments.
Improved Credit Score
Refinancing your mortgage are also suitable for people whose credit scores have improved over time. Applying for a mortgage while you have bad credit lead to your interest rate being above the average. However, if you managed to get your score up by being financially responsible, you can apply for a better interest rate by refinancing.
When is Mortgage Refinance a Bad Idea?
With debt consolidation, it may seem like a good idea to pay off high-interest debt with a low-interest mortgage. However, this will cause you problems and is considered one of the riskiest financial decisions a borrower can make. You should never transfer an unsecured loan to a debt that has your house as collateral. Being unable to pay your time can make lenders seize your home.
If you need to consolidate your debts, consider checking your debt consolidation loan eligibility for loans that focus on consolidation. That way, you don't have to put your home at risk if ever you miss payments.
Mortgage refinancing, with its lower interest rate, will save you money. Still, that shouldn't stop you from analyzing the overall cost of the loan. Don't transfer your loan into another loan with a longer-term. That way, you'd avoid having to pay more interest than if you choose to switch to a longer-term loan.
Takeaway
Mortgage refinancing can help you save more money. Its offer of lower interest rates allows homeowners to lessen the burden of paying mortgage companies every month. However, refinancing has scenarios where it could help and where it couldn't. Applying for a refinance is a huge decision to make, so think it thoroughly before you apply.
