Home loan interest rates are constantly fluctuating. If your mortgage has high rates and the current mortgage interest rates have fallen, you might be tempted to refinance the home loan. Refinancing a mortgage is a risky financial decision. For one, you may end up paying more money for closing costs.
Some mortgage financers also trick people with low-interest rates, only for consumers to pay more money due to the long payoff period.
Factors to consider before refinancing a mortgage
Refinancing your home loan is a big decision. Before proceeding with the idea, seek advice from a financial expert such as National Payday Loan Relief. Such experts will help you decide by considering the following factors:
- Your home’s equity-the larger the equity, the better the new loan
- Your credit score- you need a good credit score to qualify for a better home loan
- Your debt-to-income ratio- lenders use this ratio to gauge your capacity to repay the new loan
- Refinancing costs- refinancing a home loan is not free. You need to consider closing costs such as origination, home appraisal, insurance, etc.
- How the refinance will affect your taxes
- Do you need to pay private mortgage insurance(PMI)
- New interest rates and loan points
- Repayment period in relation to interest
5 benefits of refinancing a mortgage
Refinancing a home loan can be advantageous when done in an informed and well-calculated manner. The following are some of the ways you can benefit from taking up a new loan for your home:
Lower interest rates
Taking a new loan with lower interest rates is a good way to improve your financial life because lower interests mean lower monthly payments. Who does not want to save more money where an opportunity arises?
You can direct the money you save to pay for other bills or save it for emergencies. This can help when you need more cash streams, such as taking care of a sick family member, financing other debts, paying for your kid’s college tuition or expecting a baby.
Lower monthly payments
Suppose you have lost a job or your business has gone down? When such happens, continuing to pay off the same monthly payment may overwhelm you. Refinancing your mortgage may reduce your monthly payments if the new loan is spread over a longer loan term.
Instead of risking defaulting on a mortgage loan because you cannot raise the monthly payment, consider taking a new loan with a better and affordable payment plan.
Minimize the loan term
Do you want to save money and quicken your journey to fully owning a home? Mortgage refinancing can reduce your loan term. For example, you may switch from a 20-year mortgage to a 10-year mortgage. If the new loan has lower interests, you will end up saving money and time.
The faster you settle your mortgage debts, the sooner you shift your finances to other development projects like buying a new car, real estate or furnishing the house.
Cash-out during a financial crisis
When in a financial crisis, such as credit card, payday, car and student loans, you may refinance your mortgage for a higher loan to get some cash to settle the overwhelming debts. This can save you from losing your assets as collateral.
The cash out is not only restricted to tight financial situations. You can also refinance your mortgage so that you can invest the money. The investments may do well and pay for your house upfront and also help you purchase more property.
However, cashing out a mortgage may require you to borrow a loan higher than your old loan. This requires a pretty good credit score. Lenders are also strict with refinancing a home loan with a higher amount, so be ready to negotiate your way out. A debt management company may help you negotiate better deals than doing it yourself.
Shift from floating mortgage to a fixed rate
A floating mortgage or an adjustable-rate mortgage (ARM) is a home loan with fluctuating interest rates. The mortgage starts with a fixed initial fixed rate, but it may change few years down the loan term.
An ARM rate means you pay varying amounts of money every month and may cause uncertainty. Refinancing your mortgage to a fixed mortgage rate will remove the uncertainties. With fixed rates, if your monthly payoff is $1000, it will be that way from January to December.
Mortgage refinancing is a risky affair, but it can have several benefits when done the right way. These include lower interests, monthly payments, and a lesser loan term. Moreover, you can cash out money to pay other bills if you take out a larger loan. However, consult a mortgage expert before making the decision to avoid getting deeper into debt.
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