Why You May Need to Refinance Your Mortgage Loan
What is Mortgage Refinancing?
You are said to refinance your mortgage loan when you take a new loan to pay off the existing mortgage loan. Even though you are paying off the existing loan; that does not mean that you are out of debt. You are simply getting out of one debt to enter into another one. Mortgage refinancing is just one of the strategies people use to make their mortgage loan convenient for them. However, you need to assess your situation before jumping into this so that it won’t be like jumping out of frying pan into fire. People refinance their mortgage loans for different reasons. Perhaps you are considering refinancing your mortgage, below are some tips that will help you determine whether it is a right thing to do. In other words, below are some of the reasons why people refinance their mortgage. Your own reason may not be totally different from these.
Reasons for Mortgage Refinancing
- Better Interest Rate: This may be the commonest reason why people refinance their mortgage. It is possible that when you applied for your mortgage that you got it at a very high interest rate. The reason may be because that your credit score was not as superb as it may be now. It could even be that the interest rates on mortgage loans are generally high at that time. But now, the interest rates might have come down and may be, you have improved your credit score significantly. A very good or excellent credit score may make you qualify for lower interest rate. If that is the case, refinancing your mortgage may be a good step to take especially when you know that it will result to at least 1% savings on your mortgage cost. If you shop around, you may be able to save up to 2%. Meanwhile, when calculating the amount of savings you may achieve, you should not just focus on the interest rate alone. You need to consider possible costs you will also incur as a result of refinancing the mortgage loan. The costs you may incur include origination fee, processing fee, appraisal fee, title policy fee, escrow fee, administration fee and credit report fee etc. These costs will be added to your mortgage and you need to pay them along with your existing mortgage loan. Therefore, it is pertinent that you ensure that you are not paying too much costs just to make little savings.
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- Convert ARM to Fixed Rate Mortgage: If you were a first time homeowner when you applied for your mortgage, chances were that you opted for Adjustable Rate Mortgage (ARM) because of its enticing low interest rate. Interest rates on ARM are usually cheaper at the beginning of the mortgage. But after some time, the rate will be reviewed upward thereby making it to be more expensive than that of Fixed Rate Mortgage. If you realize that you are paying too much interest on your ARM, it is possible that you may be able to save some money on interest if you switch to Fixed Rate Mortgage. You may even look beyond today. If you know that the mortgage interest rates are probably at their lowest, it may be the right time to convert your ARM to Fixed Rate Mortgage so that you can lock in the low fixed interest rate.
- Change of repayment period: Do you feel like changing the duration of your mortgage? You can achieve this through mortgage refinancing. It may be that your cash flow appears buoyant which can help you to quickly pay off your mortgage within a shorter period. If this is the case, you may need to refinance. You will not only be able to pay off the mortgage within a shorter period, you will be able to cut off payment of interest associated with paying over a longer period. On the other hand, if your cash flow can no longer support your monthly repayment, you may decide to refinance your mortgage into a longer duration. This will result into paying smaller amount every month. However, you may end up paying more interest. Notwithstanding, this is better than having to default on your payment as a result of inability to raise the monthly repayment amount. If this will help you save your home from disclosure, I think it worth it.
- Loan Consolidation: Having to manage different debts may be tasking and tiring. In some cases, people refinance mortgage to consolidate their high interest debts such as credit card debts and auto loans with the aim of replacing these debts with low interest mortgage loans. This seems like a good thing to do but if you are taking this step, you need to be disciplined enough by ensuring that you don’t accumulate another high interest credit card debts.
Read Also: How Credit Score Affects Your Mortgage Interest Rate
- Tapping into your Home Equity: Mortgage refinancing can be a good option to raise money to cover your home improvement if you have built enough equity on your home. If you are tapping into your home equity, it is important that you either spend the money on something that can improve the value of your home or other important assets which can be considered as investments. It will totally be a mismatch to spend your home equity on vacation.
In conclusion, before you go ahead to refinance your mortgage, it is necessary that you assess what benefits it will add to you. If the costs outweigh the benefit, it may just be a mere wasteful exercise.