A home is one of the enormous life investments you can make, and refinancing is one way you can secure it when you are struggling financially. Refinancing your mortgage can be your breather in this time of age where you are short of cash. It will save you more by lowering monthly payments on your mortgage expenses.
That said before you get all excited and rush to refinancing your mortgage, it is essential to consider all factors. This will help you make a prudent decision and eliminate all possibilities of regret later. Let us delve in deeper.
What is refinancing your mortgage?
Mortgage refinancing is the process that allows you to take a new loan to replace your current home loan. Due to the unstable economy sometimes, it can be challenging to make the payments on a home mortgage.
During this period in time, mortgage refinancing may be a saver and the best option to go with. Refinancing is often done to allow a borrower to obtain a better interest term and rate.
How does refinancing works?
The process of refinancing a home is similar to the one you go through while taking a home mortgage when buying a new house. The difference is that refinancing involves taking a new loan to pay off your current home loan.
Just like in the original loan, you will be required to meet the lender’s requirements for the loan when refinancing a mortgage. The following are steps that you will follow when refinancing.
- Applying to Refinance.
- Locking In Your Interest Rate so that it does not change before the loan closes.
- Mortgage Verification.
- Home Appraisal.
- Closing On Your New Loan.
Why and when should you refinance your mortgage?
Knowing your credit score, considering your financial goal, and figuring how long you want to stay in your home are some factors that will help you understand when to refinance.
People refinance their homes for various reasons. Before you go forth with refinancing, you should be sure of why you want to refinance your Mortgage. The following are some of the reasons for refinancing a mortgage.
Change your type of loan
Different types of loans have different kinds of rates. Some loans have adjustable rates, while others have fixed rates. Adjustable rates help you save on interest, but they can go up over time while fixed rates are constant and with low rates. You can refinance your home to switch to the type of loan that favors your financial situation.
Tap into your equity
It is possible to borrow more than you owe on your home and pocket the difference as cash. This is known as cash-out refinance. People often opt for this refinancing because it allows you to borrow money at a much lower interest rate than other loan types.
Lower your interest rate
If you want to pay less, every month then refinancing can be your go-to solution. Interest rates change every time, and if your lender is offering a lower interest at that time, then why not.
Change your loan term
The longer the loan term, the higher the interest! Shortening your loan term will help you save on the interest. However, you can opt to pay a lower monthly payment and lengthen your loan term.
6 factors to consider before refinancing your mortgage
Is refinancing the right option for you? Well, there are so many factors to consider when deciding whether to refinance home loans or not. Below are some of the main factors:
Know your credit score
Your credit score will affect how high or low-interest rates you will pay. Having a higher credit score will enable you to pay low-interest rates and vice versa. If your credit score is lower than when you first purchased the house, you will have to increase it before refinancing.
What is your debt-income ratio
The debt-income ratio refers to how much of your monthly gross income do you spend on paying debts. This will determine if you are eligible for a refinance loan.
If you have taken more loans since your last mortgage loan, you will have lesser chances of refinancing. A long history of a stable job, high income, and substantial savings can increase your chance to qualify for a loan.
This refers to the point at which your monthly savings have covered the costs of refinancing. This means that after this point, any savings are yours. Divide the monthly savings by the amount of the closing costs to determine how long it will take you to break even on those upfront expenses.
Your home value will greatly determine if you will qualify for some home equity with some cash-out refinance. Most lenders do not allow refinancing when you have little or no equity. However, if you are lucky, you may get a shot with some government programs.
Terms or rates
Before filling those refinancing documents, you should know your needs. It is crucial to choose a mortgage plan that will meet your needs. Choose a shorter-term loan if you want to pay it as fast as possible.
This may have slightly higher rates, but you will be done before you know it. If you aim to reduce your monthly payments, spread your cost over the long term, allowing lower rates.
You will be required to pay private mortgage insurance (PMI) if you have less than 20% equity in your home when you refinance. However, refinancing can help you save up by eliminating your mortgage insurance from your monthly payments. This will depend on if your house value has increased and how much of your current loan you have paid.
In a nutshell, refinancing can help you save money on lower interests, cash out your home equity and spend it as you please, among other benefits. However, before taking the step to refinance your mortgage, you should be sure that it would offer you a better deal than your current loan. Speak to the right lenders and have your questions answered so that you can weigh if it is worth refinancing.