How and Why You Should Refinance Your Mortgage?

Have you ever wondered what the reasons why so many people refinance their mortgage? Maybe you have heard friends and relatives discussing it and weren’t exactly sure? There are a few excellent reasons to get a new mortgage. Refinancing can reduce your monthly payments through lower interest rates or allow you to repay your mortgage loan more quickly.

Let’s review the best reasons to refinance your mortgage, and some of the issues you need to consider.

Mortgage Refinancing Explained

The refinance mortgage option, allows you to repay the old mortgage from your lender. When you initially got a mortgage, it was used to pay the seller of the home, but refinancing allows you to start again with a loan with better terms.

While you may have been stretched financially when you originally applied for the mortgage, this may not be the case a few years later. Maybe you were only able to come up with a smaller down payment which meant getting less attractive mortgage rates? Saving for a down payment isn’t always easy but with increased equity now you could be in better financial shape.

This should mean that refinancing allows you to get a better deal as your financial situation improves.

The Benefits of Refinancing

Before you begin the process of refinancing, you need to understand your reasons for doing it. This will help show you the right direction you should take to meet your goals and save money. The benefits of a refinance might be different for one person than they are for another.

1. Changing to a Fixed-Rate Mortgage

One of the more common reasons people refinance is to get out of a variable-rate mortgage. If you started with an adjustable-rate mortgage, changing over to a fixed-rate allows you more stability in your outgoing funds. In many circumstances, an adjustable-rate will offer a lower initial interest rate which could help you qualify for a mortgage.

At times the adjustable-rate is chosen because a borrower knows they will be moving again relatively soon. If you can get a lower rate with an adjustable mortgage there would be no need to have a fixed rate. Obviously, one’s life can change quickly though and the need to get a fixed rate could become more clear.

Another reason could be the adjustable-rate increased over time, and a fixed interest rate could offer better value now.

2. Decreasing Your Payments

A lower interest rate may now be available which will reduce your monthly costs and the amount you need to spend over the course of the rest of the mortgage term. There is also the option to increase the length of the mortgage to reduce your monthly payments. This option will mean that you pay more in interest since you will be adding years to the loan term.

Sometimes people do this if they have additional expenses added to their budget and need to make monthly costs more reasonable.

3. Paying Down the Mortgage Faster

There is also the option of reducing the term of the loan. Changing from a 30-year mortgage down to a 15 or 20-year term could mean a big saving in your interest payments. It is going to mean more to pay in the short-term with higher monthly payments, but less to pay overall. Lots of people ask themselves “should I pay off my mortgage early“? There are many pros and cons to think about in this scenario.

What could be the best financial move might not be the same for someone else. The article at Maximum Real Estate goes over all the considerations to think about when figuring out whether it’s worth it or not.

4. Freeing Up Equity in Your Home

If you want to release some of the money in your home, for whatever reason, you can refinance and borrow more than is still owed. The difference will be given to you by the lender to use as you wish. This is known as cash-out refinance and can offer you a lower interest rate at the same time.

Maybe you would like to buy a boat or a new car? These are legitimate reasons why someone would refinance into another loan.

5. Removing Private Mortgage Insurance

If you are paying private mortgage insurance, refinancing can remove it from your monthly mortgage costs. This is especially true when you have an FHA loan, which can’t ordinarily be canceled, and only either selling or refinancing removes the insurance premiums. You will need to have enough equity in the property for this to be an option, however. You can see how to terminate private mortgage insurance here at Realty Biz News.

6. You Bought Land and Are Now Building a Home

Did you purchase land with the intent to eventually build your own home? One of the ways people often buy land is by getting a land loan. When the time comes to construct their dream home they will re-finance by getting a construction loan that will then turn into a permanent home mortgage.

Do You Need to Use the Same Loan Term?

If your original mortgage was over 30 years, refinancing with a loan over another 30 years can seem attractive. This will lead to much-reduced payments, even if the interest rate isn’t much lower than previously. However, since you will likely have been paying your mortgage for at least a few years, you’ll be adding to the time it takes to repay the loan and increasing the interest paid as a result.

Instead, you can ask the lender to give you a loan that matches the time remaining on the current mortgage. This will mean paying more per month than a new 30-year loan, but it should still be less than your previous mortgage arrangements. So, for example, if you have paid four years of mortgage payments and want to refinance, you might ask the lender to amortize your new loan over twenty-six years instead of thirty.

Many lenders are move flexible today than they used to be. It is not uncommon at all for a lender to write mortgage over and unusual time period. There are many mortgage myths out there so make sure you don’t fall for one of them!

Steps For Refinancing a Mortgage

◾ Decide the reason why you are refinancing as the lender will ask your purpose for doing so.
◾ Seek out and find the best mortgage deals.
◾ Apply for a mortgage with a couple of lenders. Here is what the lender will need to give a mortgage. Make sure you make all of your applications at once to lower the impact on your credit score.
◾ Pick the lender that best suits your needs along with providing you the best terms. Make sure you compare the loan estimates.
◾ Lock your interest rate when appropriate. If you can afford to gamble a bit watch where interest rates have been trending.
◾ Close on your refinance.

Running the Numbers

If you believe that getting a new mortgage is right for you, check the numbers to make sure. There are refinance calculators available to help, though you will have to make some assumptions about interest rates, the loan amount, and the fees involved.

With this information, you should be able to work out how long it will take before refinancing starts to pay off. There are going to be fees required to set up a new mortgage and this will eat into the savings you make from the refinance mortgage. When you begin to look around for new mortgage deals, this will give you a better understanding of the time it will take for you to break even on the new loan.

When looking to refinance your mortgage, you should check with many different lenders to find out what they will offer. Then you can compare the options, to find which lender will give you the deal which matches your requirements.

6 Crazy Good Reasons to Refinance a Mortgage by Bill Gassett | Realty Biz News