With the many types of mortgages and financial solutions flowing around today, you may be wondering which one is right for you. If you are struggling to make payments on your mortgage, and are looking for ways to lower payments, refinancing your home may be the answer.
What is Refinancing a Home?
Refinancing is when a homeowner renegotiates the current mortgage loan, creating a new mortgage with new terms. It is usually done so your finances will improve, paying off the first loan and then replacing it. The new loan will have lower monthly payments. Refinancing can be done as often as needed, but you have to keep in mind, it can only be done every seven months. Your collateral and the original balance of the loan will not change.
When you refinance, your mortgage lender will look at the current market value of your home, check your tax and credit history, and give you options. You will be able to cut back on the number of years on your mortgage, take out some home equity, or lower the monthly payments you need to make.
Refinancing your home will not only reduce your monthly payments, but it will also save you on interest. It also helps you pay off your mortgage faster, save money and build home equity. You may also be able to make more money than you think if you ever sell your home, by reducing the time it takes to pay off your mortgage.
Why should you refinance your Home?
You can use refinancing to pay off debts, or even consolidate debts into one payment. Refinancing also allows you to use your home equity if you wish to get funds that way. People will often use this way when they are faced with tuition, home improvements, renovations, and other expenses that require a larger sum of money.
When Should you Refinance your Home?
There are several simple reasons to think about when deciding when to refinance your home.
- See if your mortgage has a higher interest rate than other houses on the current market. If you have a new mortgage, you will have to wait seven months, making six mortgage payments, before refinancing is possible.
- Do you need funds for much-needed home repairs, debts, or emergencies? You can use home equity.
- Are you changing mortgage companies? Sometimes when faced with a decision like this, you will be offered either a better rate to stay, or better to go.
- How long are you going to be staying in your home? Refinancing makes sense if you are staying in your home for several years.
- Refinancing is more successful when interest rates are low. This can shorten the mortgage term.
Trying to refinance when you are planning on moving is not a good idea. This goes for flipping houses too. Refinancing works well when you stay in your home for at least five years. You need to have good credit. Make sure you can afford closing costs.
You can save money when refinancing. Saving money on the monthly payment is the biggest reason people decide to refinance their homes. Here are a few ideas to help you with your decision:
- Credit score: Look at your credit score and check to make sure everything is right. If you have to improve your score, there are things you can do. To improve your credit score, look at your savings and income, and make sure they are strong. Stay away from using credit cards, or opening new bank accounts.
- Costs: Pay lender costs and other fees. Make sure you research the costs involved with refinancing. You may have to pay legal fees, closing costs, or private mortgage insurance. If you pay these costs. You will have more of your monthly payment going to the principal reduction.
- Research: look over the differences between fixed-rate mortgages and other types of mortgages, to make sure you know which type you want. Fixed-rate mortgages make it easier to save money and work on finances. Research mortgage terms and find one that suits you.
- Plan: Plans are always good. Decide what you are going to do with the money will have leftover each month. Plan wisely, as you don’t want to spend any of the money you are saving. Because of the period between old payments and new mortgage payments, you can use the extra money to pay off some debt like a credit card.
- Appraisal: although it may not be necessary, an appraisal can tell you if your house is worth more than the lender says it is. If you get an appraisal, clean the house and make it presentable. Check the temperature and put the pets somewhere they will be out of the way. Make the lawn presentable and tidy the exterior of the house. See what other houses in your area are going for and you can give that list to the appraiser.
Benefits of Refinancing Your Home
- Low-Interest rate: With a low-interest rate, you will have smaller payments each month. More of your payment can go to paying the principal of the loan.
- You can change terms: If you have a 30-year term, you and switch it to a 15-year term, cutting down on the amount of interest you’ll have to pay. You will be able to pay off your loan quicker. This will also give you more options to make more money if you ever sell your home.
- Home Equity: Making payments on your mortgage, and making improvements to the home, both help build equity. When you refinancing you have the option of using that home equity. If you need it.
- Fixed-rate: Moving rates from an adjustable-rate to a fixed rate, can make a big difference. By using a fixed rate, you will be able to budget easier and know what you are going to have to pay each month.
Costs to Consider
- Closing costs: there are refinancing costs to pay with a new loan, such as home inspections.
- Paying for Points: sometimes you can pay for points to get the lowest interest rates.
- Prepayment penalties: There are mortgages that will make you pay if you pay off your balance earlier than expected. Read the terms of your mortgage carefully.
- Takes longer to break even: if you lengthen your term, it will take you longer to break even, costing you more money.
- Underwater: Taking out too much money can make you spend more time and money than you wanted to. You don’t want to have a mortgage worth more than your home.
Because everyone has a unique financial situation, it always helps to have an experienced and professional mortgage broker at your side. Mortgage Mom is here to help you, and guide you, so you have the information to make your decision. Ask us today, if refinancing is the right option for you.