November 4, 2019

All About Mortgage Refinancing

All About Mortgage Refinancing

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Refinancing is the process of replacing and paying off an existing loan with a new one. The reason to refinance for a home can vary from owner to owner. Those reasons can include but are not limited to converting from an adjustable-rate mortgage (ARM) to fixed-rate mortgages, or vice versa, to gain a lower interest rate, to reduce the term of a mortgage, to consolidate debt and many more.

If you are considering to refinance your loan it is important to first get introduced to the whole picture, with a clear understanding of its benefits and possible shortcomings, regardless of the goal you want to refinance for.  

Benefits of Refinances. 

Several of the potential advantages of refinances can include:

  • Reducing your monthly payments: Taking into account that an average homeowner has a chance of saving over $160 or more with a refinance per month, refinancing can offer you a lot of financial support and provide savings. As a result, thanks to lower payments and additional monthly savings you will have the chance to cover other expenditures and debts, or even try to pay off your loan sooner. 
  • Remove private mortgage insurance (PMI): With some specific cases, some homeowners with enough appreciation for property or principal paid off will not be forced to pay mortgage insurance, which will result in the reduction of the overall mortgage payment. 
  • Reduce the length of a loan: Decreasing the overall length of the loan is considered one of the primary reasons why many homeowners are considering refinancing. This is because, for most of the homeowners who take their first loan in their early career stages, a long 30-year mortgage can make a huge financial sense. As a result, being able to reduce the term of a mortgage is a very attractive option for many the homeowners.
  • Switching from an adjustable-rate mortgage to a fixed-rate loan:  In case of an adjustable-rate mortgage, the interest rates of your loan can fluctuate up and down. Changing it into a fixed-rate loan, when you will have a fixed and stable monthly payment, can give the homeowners an inner peace and financial security that their payments will not change over time. 

Next to those benefits, depending on the specific goal you are considering for refinancing it also contains several potential risks.

One of the examples could be the amortization process. Usually, refinancing your mortgage restarts that process.  Taking a more precise example, let’s consider a case when you are already into the last five years of paying off your 30-year mortgage and then you decide to take another 30-year mortgage. In this case, you will be paying for a 35 years mortgage. In some cases, this can still be considered as a good option. But for homeowners who are already in their 10 or 20 years of a mortgage, the lifetime interest will not be worth the extra costs. In instances like this, some homeowners will refinance to a shorter-term loan.

Even though getting introduced to the benefits and the potential shortcomings of refinancing can be helpful, before making a final decision on taking refinancing or not there are still several things to take into account. 

Those include: 

  • Knowing your home’s equity: The equity of your home will be the first requirements you will need for refinancing. The best and most effective way to find out if you qualify for a particular program to visit a lender and discuss the specifics of your needs. Take into account that homeowners who have at least 20% equity usually have an easier time qualifying for a loan. 
  • Knowing your Credit Score: In recent years it has become a little difficult to qualify for a loan because lenders have tightened the standards for the approvals. So, some homeowners may be surprising for not qualifying for a loan even with good credit, even for the lowest interest rate. Take into account, that most typical lenders consider a credit score of 760 or higher to be a good indicator to give qualification for the lowest interest rates. 
  • Knowing the cost of refinancing: Refinancing a home would usually cost you about 3 or 5 percent of the total amount. There are some lenders who offer a “no-cost” refinance, which means that you will as well pay a higher interest rate to be able to cover the closing costs.