You want to replace your existing mortgage, taking advantage of your improved income and favorable market. You simply need to refinance and get a new mortgage, replacing your existing one. But is it the right time to refinance? Here are some tips that help you determine whether you should proceed with a refinancing option.
- An increase in income will allow you to reduce the term of the loan by paying down a bit extra every month. This will help you save on the total interests while enabling you to become debt-free sooner. On the other hand, if your income has gone down, you may want to extend the term of the loan further, reducing the monthly payment.
- An improved credit score will enable you to qualify for a better mortgage rate. A lower interest rate will result into the reduction of monthly payment. Alternatively, you may want to pay off your debt quickly by making the same payment each month.
- If the market has changed since you take the first mortgage, you may want to take the benefit of reduced interest rate. Refinance your home to lower your monthly payment.
- If you want to reduce your monthly payment, you can either extend the term of loan or obtain a lower interest rate. In either situation, a refinancing option works the best, but you need to qualify for the loan.
- People with an adjustable-rate mortgage may want to switch to a fixed-rate option after a few years. This is done to reduce the risk associated with a variable-rate mortgage. On the other hand, if the market conditions turn favorable, you may want to swap a fixed-rate mortgage with an adjustable-rate mortgage.
- An important reason for refinancing is debt consolidation. If you have several high-rate debts, you can consolidate the same into one loan with a single payment each month.
- Refinancing neither erases your loan nor comes for free. You need to pay closing costs and a number of other fees as you do with any other mortgage. The borrower might need to bear the cost of application, appraisal, origination, title search, inspection, attorney and lender. Moreover, you may also need to pay a prepayment penalty.
- Seeing the high cost of refinancing, it only makes sense when you plan to stay for a long time in your home. Use a calculator to see how quickly you recuperate the closing costs and other fees with lower monthly payments.
- Refinancing can also be a good idea to remove the need of private mortgage insurance. You might have needed it because you didn’t have enough money to pay down. Now that your equity has increased, you might be able to cancel PMI.
As your equity improves, your home becomes a valuable asset for you, which you can use to obtain extra cash. If this is what you want to do, then you need cash-out refinancing, which is a great way to tap the financial value of your home and pay for a variety of other expenses, too.
