Everything You Should Know About Mortgage Refinancing
Choosing to refinancing your mortgage comes with numerous advantages, especially if you wish to save money, repay your debts by tapping the equity or ensuring better rates or terms. For instance, lowering rates for a single percent can help you save significant amounts in the long run.
At the same time, some people choose to speed up the process, meaning they can refinance 25-year into 15. As a result, they will end up repaying everything faster, while ensuring the lower interest rate in the long run.
You probably understand that a home is one of the most important and expensive investments we make throughout our lifetime. Therefore, you must find a proper mortgage that will help you handle each step. Of course, we can differentiate numerous compelling reasons for refinancing, especially if you wish to meet a specific financial goal.
Still, before understanding the entire process, you should take a step back and ensure you understand each step along the way. As a result, you will create a perfect picture and create a strategy to achieve the goals with ease.
Things to Know About Refinancing a Mortgage
Generally, mortgage refinance is not as simple as it seems, but it works the same way always. You will use a new loan to repay the old or existing one, which is the end goal. However, the new one may feature different interest rate or new principal. Since it will replace the original mortgage, you will end up with new monthly installment depending on option you chose.
During the application, the lending institution will consider your credit rating and score. At the same time, they will review and check out your tax history, income and assess your current home value.
Lenders will use the relevant info to determine whether you qualify for the amount you wanted in the first place. In case you do, the next step is to determine the best course of action, meaning you can reduce monthly installment, shorten the length, or tap into the home’s equity.
- Reduce Interest – A small change in percentage can make a significant difference throughout the loan’s life. Therefore, if you wish to live in house you bought for the next fifteen to thirty years, you can take advantage of this option.
- Handling Emergency – In some situations, you must handle a specific financial obligation to ensure the best course of action. We are talking about medical emergencies or college tuition. Refinancing mortgage will allow you to take advantage of your home’s equity, meaning you can repay the existing debt and take lump sum you can spend based on your preferences You can use the money to handle the expenses.
- Reduce Monthly Installments – When you reduce the overall interest, you will end up paying lower installments.
Benefits of Refinancing
We can differentiate numerous advantages of refinancing a mortgage. Although most of them will affect your monthly installment, you can also choose shorter term, reduced interest and many more. In further article, we will present you the most common reasons to refinance:
- Reduce Payment – In case your current interest rate is higher than regular, you can save money by choosing a new loan instead. When you reduce the percentage, you will save lump sum throughout the loan’s life, which is vital to remember.
- Eliminate PMI – As soon as you decide to purchase a household, you must think about a down payment to get better terms eventually. The best course of action is to save at least twenty percent of the overall payment. However, if you purchase a home with lower down payment, you will end up paying PMI or private mortgage insurance apart from interest and principal. Therefore, when you build twenty percent equity, you can refinance to cut the insurance and save money as time goes by.
- Reduce the Length – If you wish to repay your household faster and become owner without waiting for the next twenty-five years or more, you can shorten the length. As a result, you will end up with higher monthly installments, but lower interest. Still, you will repay everything faster, meaning you’ll become owner faster.
- Convert to a Fixed Rate – Although most people choose adjustable or variable-rate mortgages, because they feature lower interest during the initial term that lasts up to five years, you should know that the rates will spike afterward. Since you will enter a point of unpredictable payments, especially since today the rates are increasing, you can refinance into a fixed-rate option. As a result, you will end up with predictable installments that will not change over time and will remain the same throughout the loan’s life. Fixed-rate interest is better solution because it will help you plan the monthly budget and avoid sudden changes.
- Tap Home Equity – It doesn’t matter whether you wish to handle high-interest debt, remodel your household, or handle a significant expense, because tapping the home equity can help you throughout the process. You can use mortgage option that will provide you peace of mind. Of course, you must have at least twenty percent equity to take advantage of cash-out refinance, meaning you will borrow against your home’s value. We recommend you to choose this option only in situation when you wish to invest the additional sum into a household. That way, you can get a rebate from the IRS, while you can boost your property’s appeal by investing in home remodeling project.
You should know that household owners can refinance their homes to draw the equity for numerous uses. Still, before making up your mind and making everything official, you should understand the expenses that come with refinancing.
We are talking about changing your credit rating or score, and determining the best quote that will reflect your situation. Besides, you should determine the upfront costs as well, which can lead to inability to break-even in the next few years.
Although refinancing comes with numerous advantages, you should understand the potential problems and disadvantages that will affect your situation. By learning more about them, you can prepare yourself for all options.
- New Closing Fees and Costs – When choosing a new loan, you will be responsible for handling the initial expenses. We are talking about closing fees and expenses that include home inspections and other things lenders may require for you to handle. Most people choose to roll the amount into the loan, but the process will affect your monthly expenses and interest rate. That is why you should check out whether the new course of action works for you or not.
- Lower Rate/Higher Fees – Getting the lowest rate possible requires paying specific points, meaning you will need cash to handle each step along the way. Of course, you will reduce the overall expenses eventually, but you should have a significant amount to invest.
- Prepayment Penalties – You should check out whether your current mortgage (med betalingsanmerkning) comes with prepayment penalties, meaning you will end up paying more after deciding to handle everything at once. That way, you should understand each step along the way including conditions and terms before closing.
- Long Break-Even – For instance, if you extend the mortgage life for a few years, you will boost the break-even point. Everything depends on whether you intend to live in your household or not. If you wish to move in the next few years, refinancing will only bring you additional expenses.
- Underwater Debt – For instance, if you take too much money, you will end up with higher loan than your overall household’s worth. In case this happens, you will enter an underwater point, meaning you will not be able to boost the equity to a desired length. If you wish to avoid this particular trap, you should find a professional who can evaluate the market value of your home before you make up your mind.