By Are you stuck with a mortgage with unfavorable terms, conditions, and interest rates? Or perhaps you need some money for renovations, paying bills, and other uses? Refinancing your mortgage can help.
However, mortgage refinancing has notable financial implications and shouldn’t be done on a whim. Here is an overview of how mortgage refinancing works, the various refinance options you can choose from, and the ideal conditions and best reasons for refinancing.
What is Mortgage Refinancing?
Mortgage refinancing essentially involves replacing the old mortgage with a new one. Notably, the new mortgage usually comes with a new principal amount, lower interest payments, and more favorable terms and conditions.
Mortgage refinances are categorized into various types, depending on the nature of the new loan. Popular refinancing types include the following:
- Cash-Out Refinance: It works by using your home’s equity to borrow cash for your personal uses, such as renovations. However, cash-out refinancing increases the mortgage debt.
- Cash-In Refinance: It works by making a lump-sum payment to reduce the loan-to-value (LTV) ratio, reducing the total debt and potentially lowering the monthly payments. Moreover, it can also qualify you for lower interest rates.
- Rate-and-Term Refinance: It works by changing the mortgage’s interest rates, repayment term (length), or both.
- Debt Consolidation Refinance: It works like cash-out refinancing, whereby you get some cash out of your home’s equity. However, you can only use the cash to pay off other non-mortgage debts, such as credit card debts.
- Reverse Mortgage: It works by withdrawing your home’s equity through monthly payments from the lender. However, this option is only exclusively available to borrowers aged at least 62 years old.
Interestingly, the mortgage refinancing process works like applying for a new mortgage, including submitting documents such as pay slips and bank statements. Moreover, you can refinance with a different lender.
Why Should You Refinance?
Refinancing your mortgage can benefit you in various ways, such as making the loan more manageable. Here are four compelling reasons to refinance:
· To Lower Your Interest Rates
Obtaining lower rates reduces your interest payments, saving you hundreds to thousands of dollars over time. It also lowers your monthly payments if the term remains unchanged, making repayments more manageable.
· To Change Your Repayment Term
Mortgage terms (repayment periods) affect interest rates and monthly payments. Overall, longer terms come with higher rates and monthly payments, and vice versa. Additionally, terms also determine how long you will be making repayments.
You can refinance to reduce your term, reducing your interest and shortening the repayment period – however, you would make higher monthly payments. Alternatively, you can refinance to increase the term, reducing your monthly payments to ease your financial burden – however, you would pay more on interest. Overall, this benefit is a compromise with unavoidable benefits and disadvantages.
· To Change Your Loan Type
Mortgages come in various types, such as fixed-rate and adjustable-rate mortgages, with varying benefits and shortcomings. For example, fixed-rate mortgages are ideal when interest rates are low, while adjustable-rate mortgages are ideal when rates are high and volatile. Refinancing enables you to switch one mortgage type for another.
· To Cash Out Your Equity
Cash-out refinancing enables you to borrow cash on your home’s equity when you borrow more than you owe. You can use the cash however you want, including repaying other debts to ease your immediate financial obligations.
When Should You Refinance?
Mortgage refinancing only works in your favor when the conditions are right. Overall, there are two ideal conditions for refinancing:
· When Interest Rates Drop
Mortgage interest rates depend on the general economy’s lending rates, which fluctuate over time. To this end, refinancing when the interest rates drop means that you get lower interest payments. Notably, refinancing when interest rates drop is especially recommended for fixed-rate mortgages.
· When Your Credit Score Increases
Your credit score also determines your mortgage’s interest rate. A lower credit score lowers your reliability, resulting in higher interest rates. As such, refinancing when your credit score improves can lower your interest rates and improve the repayment terms.
Conclusion
Mortgage refinancing is a good idea with several notable and life-impacting benefits, but only when the conditions are right. Ideally, refinancing is only recommended when interest rates drop or your credit score increases to lower your payments and secure better terms. Overall, it is recommended that you consult a professional if you are uncertain about refinancing.
