When mortgage rates drop, most homeowners tend to refinance their loans immediately. Unfortunately, it isn’t always the best decision everyone should make. Refinancing mortgage loans can be tricky and overwhelming at the same time. Thus, it is crucial to understand when is the right time to refinance mortgage loans.
What it Means to Refinance Your Mortgage
Refinancing mortgage loans is the process of getting a new mortgage to pay off an older loan. Refinancing allows borrowers to come up with a better loan. In most cases, borrowers refinance mortgage loans because they found more beneficial loan terms that can help improve their finances.
What are the Things You Need to Consider Before Refinancing Mortgage Loans?
Set a goal.
There are various ways to refinance mortgage loans. To find the right one for you, it is best to set your goal first. Whether your planning to shorten your payment terms or you’re switching from adjustable-rate to fixed-rate loan, getting a clear understanding of what you want to achieve is crucial when refinancing mortgage loans.
Consider how long it takes to refinance a mortgage.
If you’re planning to refinance mortgage loans, it is best to talk directly to a mortgage consultant first. By doing so, you’ll get detailed information about the terms and conditions including the amount of time it takes to refinance a mortgage. The time needed to complete appraisals, credit checks, inspections and submissions of other requirements will tell how little or how long it will take to refinance mortgage loans.
Think about closing costs.
Before deciding to refinance mortgage loans, you might want to think about closing costs first. Refinancing mortgage loans not only means exerting time and effort, it also comes with closing costs. In most cases, refinancing mortgage loans includes charges for appraisals, attorney’s fees, taxes, title insurance and transfer fees. In most cases, closing costs often amount to 2% to 5% of the principal amount of the loan.
Fortunately, most lenders allow closing costs to be included on the borrower’s principal balance, making it a part of the loan rather than requiring them to pay it upfront.
Consider the time it will take to recoup closing costs.
When thinking about refinancing mortgage loans, the interest rate isn’t the considerable factor you should think about. You also have to think about the time it will take to recoup the total closing costs. To help you decide whether to refinance mortgage loans or not, calculate the amount of time it will take for the closing costs to pay for itself.
Think about Mortgage Insurance.
Most people are looking for low or zero-down payment options as it allows them to obtain a new mortgage loan with less than 20% down. However, when planning to refinance mortgage loans, you have to keep in mind that you will be required to carry Mortgage Insurance, causing your monthly payment to increase.
Fortunately, other refinancing options can also pull out your Mortgage Insurance, which can ultimately save you money in the long run. In addition, homeowners that are not considered as high-risk borrowers with an equity of 20% or more, will not need to pay Mortgage Insurance.
Think about how long you want to keep your home.
Another important factor you need to consider before you refinance mortgage loans is the amount of time you’re planning to keep your home. If you’re looking to spend several more years at your home, it might be best to refinance mortgage loans. This is because most refinances often need months or even years before it can save you money.
Why Refinance Mortgage Loans?
There are various reasons why most homeowners refinance mortgage loans. Here are some:
When looking to secure a lower interest rate.
One of the most common reasons why homeowners refinance mortgage loans is to secure a lower interest rate on their previous loan. Not only can it help you save money, a lower interest rate also increases your chances to build equity in your home. To top it all, reducing interest rates can also help lessen your monthly payment.
When planning to shorten the current loan term.
Most homeowners tend to refinance mortgage loans especially when they are planning to shorten their current loan term. Refinancing mortgage loans once the interest rates fall is the best opportunity most homeowners should take advantage of. This gives them the chance to refinance an existing loan for another one with a significantly shorter term and the slightest change on the monthly payment.
- When converting from an adjustable-rate mortgage (ARM) to fixed-rate mortgage.
While balloon programs such as adjustable-rate mortgage (ARM) offer lower initial monthly payment, these periodic adjustments often lead to an increase in rates. In most cases, these rates are even higher than those that are offered through fixed-rate mortgages. When this happens, converting from adjustable-rate mortgage (ARM) to fixed-rate mortgage can help to lower interest rates.
Converting from a fixed-rate mortgage to adjustable-rate mortgage (ARM) should only be considered if the interest rates are dropping.
- When planning to consolidate debts.
Most homeowners refinance mortgage loans to consolidate debts. Although choosing a low-interest mortgage over high-interest debt, may sound like a sensible option, you have to keep in mind that refinancing mortgage loans doesn’t mean gaining financial prudence.
- When looking to cash-out home equity.
Most homes increase in value over time, making them an excellent source of extra income. Once their home increases in value, most homeowners access their equity to put the money in good use. In most cases, people tap their home’s equity to cover the costs of home remodeling, child’s tuition fees or credit card debts. Another major reason why homeowners are into a cash-out mortgage refinance is that it is usually tax-deductible.
When is the Right Time to Refinance Mortgage Loans
Refinancing mortgage loans can be a slippery slope. But if done properly at the right time, refinancing can act as a helping hand on your finances. It is best to refinance mortgage loans if you think it can help reduce your mortgage payment and help you build equity at the same time. It is also crucial to refinance mortgage loans if the cost of refinancing can be offset by your total monthly savings. Additionally, refinancing mortgage loans can also be a sensible tool if it can help you bring your debts under control.
How to Refinance Mortgage Loans?
When planning to refinance mortgage loans, the first thing you have to do is to make sure that you are qualified to refinance. Keep in mind that having a home and settling monthly payments on time isn’t the only basis to qualify for refinancing mortgage loans. It also depends on other factors such as your income, your credit score and the total equity of your home. In most cases, borrowers with higher credit scores are given the opportunity to refinance with lower interest rates.
Refinance Mortgage Loans with Financity
Get the most out of mortgage loans refinancing through the help of Financity. We are a mortgage financial advisory company that aims to bring unique financial service to our customers. With Financity, you can expect outstanding financial assistance tailored to your needs.
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