Posted by John Doe
Refinancing, which means replacing your current mortgage with a new one, is usually done to help you, the borrower, get a better interest term and rate. Homeowners choose to refinance their mortgage for a variety of other reasons as well, in order to reduce monthly payments, take cash out of your home equity for large purchases such as an investment property or higher education, or to change mortgage lenders.
There are many good reasons to refinance, with the leading one being getting a reduced interest rate. Many homeowners grow older and have greater career security or success, leading to them saving more money. Making more income means that you will be able to pay off your bills responsibly and can lead to an increased credit score. If your credit score improves from when you first applied for your mortgage, you can apply again to refinance and receive a lower interest rate based on your higher credit score. A lower interest rate could save you hundreds of dollars a year.
You may also want to extend or shorten your mortgage term. If you are having trouble making payments, you could refinance and extend your mortgage so that you make lower monthly payments. Alternately, if you’re five years into a 30-year mortgage and you refinance with a 15-year mortgage, you can pay off your mortgage faster.
Another common reason homeowners refinance is to afford large purchases and expenses. These expenses could be unplanned or related to an emergency, such as reducing credit card debt, or paying for an unforeseen large expense. You could also refinance to help out with big purchases that you need, like a new car. Some homeowners refinance their first home in order to purchase another property. As homeowner’s children grow up, the cost of higher education may also be a reason to refinance. If you are thinking of refinancing for this reason, it’s important to have a plan for how to repay the loan. For instance, if you are taking out a loan to renovate or upgrade your home, therefore increasing the value of your home, refinancing is often worth it, as increasing the value of your home will also increase your home equity.
If you are planning to spend the money on a purchase like education or a car, it’s best to create a long-term plan for repaying the loan, or you could end up in debt with your home acting as collateral.
If you are refinancing in order to take money out of your home equity, then you are taking out a loan and using your equity (the part of the home you actually own) as collateral in that loan. This works much the same as a line of credit, just using your home equity. A home equity line of credit is calculated based on the value of the home, the percentage of that value the lender is willing to loan, and the balance on the current mortgage. Your home equity will not only increase as you make payments, but can also increase based on the value of your home. As the value of the home increases, so does your equity. If you are curious about what kind of mortgage loan you could qualify for, you can use an online mortgage loan calculator to find out.
With most lenders, you are required to maintain your original mortgage for 12 months before refinancing. This can vary from lender to lender and it’s something to check before you take out your first mortgage, just in case you might want to refinance one day. It is also usually easiest to refinance with the same lender. This can also eliminate some closing costs such as appraisal and title search fees. Your original lender may also offer you a better refinance rate than a new lender.
There are some risks involved in refinancing, the biggest being foreclosure or loss of your home. It’s important to consult with a mortgage professional, and make sure you’ve carefully considered all the risks of refinancing before going ahead with it. You may also end up with a longer mortgage term. For instance, if you are in a 30-year mortgage and you refinance four years in with another 30-year mortgage, you will be stretching your mortgage out for four extra years. Depending on interest rates, this may still be worthwhile. While refinancing is a good idea for many homeowners, each situation is unique and should be carefully considered.
Like your original mortgage, there are closing costs associated with refinancing. These closing costs include an application processing fee, a title insurance policy, legal fees, and appraisal fees. Make sure you understand all of the costs associated with refinancing before you jump in.
A good place to start if you are thinking of refinancing is with an online mortgage loan calculator. A mortgage refinance calculator may not be exact, but it can give you a good idea of what kind of loan and rates you can expect. After that, you will want to speak to a mortgage professional for guidance through the application process, and so they can help you get the lowest possible rate. Don’t be afraid to shop around and speak to different mortgage lenders in order to get the best possible rate and loan.