Refinancing your mortgage is an alternative way of paying off a loan, often a mortgage loan, with lower interest rates and lower payments. Refinancing your mortgage is not simply a second mortgage. It is new money that will help you pay off your original mortgage, but often with better terms.
While this probably sounds fantastic, it is not something everyone should consider right now. Before you take the plunge, be sure that you are ready to refinance your mortgage, and be sure that it is the right time for you to change the terms of your original agreement.
Read the four tips below to see if you’re ready to refinance your mortgage.
You Have a Good Loan Record
Before you consider refinancing your mortgage, make sure you have a good loan record. If you haven’t had any late payments for twelve months, then chances are you’ll get a low-interest agreement.
However, if you’ve had trouble keeping up with your monthly payments, and have a poor credit rating as well, it is unlikely you’ll be given a new term that beats your present agreement. Lenders want to ensure that their clients return their capital, and a poor financial history does not make you an ideal candidate for any lender.
The Rate of Inflation is Right
Don’t disregard the significance of inflation. As inflation determines the interest rate, you will want to wait until the inflation rate falls in order to get lower interest rates. Waiting for a lower inflation rate can save you thousands of dollars in the long run.
There are Good Terms
In addition to a low-interest rate though, you will want to make sure that there are other savings. Before you change your current mortgage loan agreement, check that refinancing your mortgage will provide you with lower overall rates, or that you will be able to pay off the loan in a shorter amount of time. You need to compare the total costs with the total savings to see if it really is a good switch for you at this time.
The Value of Your Property Has Increased
It is not a good idea to refinance your mortgage if the value of your property has gone down. This could mean that the amount you are offered to refinance your mortgage could be lower than the original mortgage loan amount.
Additionally, once the value of your property has increased, you have the option to take a loan out on the equity of your home to help you pay for something else. Doing this can help you pay off other high-interest debt, such as credit card debt or auto debt, or it can help you pay for post-secondary education.
If these four pointers are relevant to your current situation, then you’re ready to refinance your mortgage. While this is a great way to better manage your money, be aware of penalty clauses, or provisions, that could negatively affect your savings.
It is a good idea to consult with a financial advisor first to ensure that you’ve picked a new term that will not be a hindrance to your bank account.
Now May Be The Time To Refinance Your Mortgage
Loans are intimidating and sometimes you may find yourself in a position where refinancing may be something to consider, such as when mortgage rates are falling and you currently have a fixed-rate. One thing is certain; making such a change should not be taken lightly.
Refinancing is a serious decision that should generally be done no more than once in the lifetime of your loan or you can end up paying more in the long run than you are saving today. We’ll explain a few things you may want to think about before making a decision to change your current mortgage.
Consider the Life of Your Home and Equity
Before refinancing, it’s important that you ask yourself how long you plan on living in your current residence. There are (in most cases) closing costs associated with refinancing and if, for example, you are going to be paying a few hundred dollars less per month with a high closing cost of a few grand and you end up moving out of your home in six months, then you are going to be paying far more out of pocket than if you would have stuck with your initial mortgage.
In most cases, you are going to need to have at least 20% equity in a home to get the best deal when it comes to refinancing. If you have lived in your home for quite some time and have accumulated a large amount of equity, you may be able to refinance for much lower than what the original loan sum was.
Those lower monthly payments can make a drastic impact on the financial comfort of your family. Another thing to think about is whether you truly want to extend your mortgage out to, say, 30 years – placing yourself back at square one or if you can handle a 15-year mortgage instead.
If you have already knocked a large amount of money out of the total, your family could be paying far less than they would have if you added a few more years to your loan.
Taking Advantage of Great Opportunities
There are times where life doesn’t just hand us lemons, but a pre-made carton of lemonade. In order to benefit from such situations, you have to be able to recognize lemonade when you see it.
What we mean is, not everyone is lucky enough to have outstanding credit but when you do, there is an abundance of mortgage opportunities available to you. If you are able to find a mortgage with a much lower interest rate, it may be time to take the plunge.
Of course, you must consider if there are going to be closing costs (sometimes there aren’t). Instead of extending your loan, you may be able to take the additional money you are saving along the way and place it towards the principle of a smaller loan.
This could potentially mean paying off your mortgage quicker than you would have originally if you’d stuck with the longer payment period.
How a Refinance Can Help You Manage Debt
A home can be a great investment. Its investment value can be realized not only when you sell it, but while you still live there. Refinancing a home mortgage can help homeowners with a variety of financial problems. If you are late on other bills or you just have more credit card debt than you are comfortable with, a refinance may help you get into a situation where you feel you are able to handle all of your bills.
- Refinancing can result in a lower interest rate. Having a lower interest rate means paying less over the life of the mortgage. For the first few years of a mortgage loan, most of the monthly payment is applied to interest. If you are paying less in interest, you are naturally paying more in principle. Many people choose to use the lower interest rate to keep their payments low, others shorten the life of the loan so it can be paid off sooner.
- Lower interest rates generally result in a lower monthly mortgage payment. If you have equity in your home, a refinanced mortgage will likely result in lower payments. Having a lower monthly mortgage payment will allow you to pay off other high interest debts, thus helping you raise your credit score and qualify for low interest credit. If you have other debts, it is important to make a personal budget so you will not get into financial trouble again.
- Refinancing can get you cash to consolidate your debts if you have significant equity in your home. You don’t have to use the cash for your other debts, but if you have outstanding bills, a cash-out refinance may get you the money you need to pay them off and stop the calls from the creditors. It is a good idea to consider paying off all debts that have a higher interest rate than your mortgage with the money you get from your refinance.
- Cash from a refinance can be used for anything. That cash can be used to pay other bills, remodel or otherwise upgrade your home, or to pay cash for something you would have normally bought on credit. If you plan to sell your home in the future, making home improvements may increase the value of your home.
- Refinancing can extend the life of your mortgage or shorten it, whichever works best for your situation. There are definite tax advantages to having a mortgage loan. The interest you pay on a home loan is tax deductible. However, many people prefer to own their home free and clear, without a monthly mortgage payment. Whether you want to extend or reduce the term of your current mortgage, refinancing can provide a solution.
If you are having a problem keeping your bills current and you own a home, refinancing your current mortgage may help alleviate your financial stress. A mortgage broker or a bank’s loan officer will be able to discuss your personal financial situation with you and help you find the best mortgage to help you meet your overall financial goals.