Are you thinking about refinancing your home loan? This is not an easy to decision to make. When you refinance your mortgage, what you basically do is pay off your existing home loan and create a new one. The procedures for refinancing a home mortgage are almost the same as applying for a home loan, so you should be familiar with the steps. However, is financing your home the right way to go?
You must be very careful before making this decision. For you and millions of Americans out there, your home is your most valuable asset. You must always make sure that its value is not depreciated as you move from one mortgage to a new one, and there are several factors that you have to consider. These factors will determine if refinancing your mortgage is the right step for you.
You can find several reasons why it can be advantageous for you to refinance your home mortgage.
A Chance to Lower your Interest Rate
Interest rates change all the time depending on the condition of the economy. The Federal Reserve cuts or increases the interest rate to achieve its objective of either encouraging saving or increasing spending. The lower the interest rate, the lower your monthly amortization will be. It may also allow you to build your home equity that much faster.
Another factor for the interest rate is your credit score. If your credit rating has improved over the years, your risk profile will also lower. Banks would probably give you a lower interest rate. If the current interest is much lower than the one in your mortgage, try to see how much of a difference it makes. If it is significant, then you might want to consider a refinancing.
Modify the Terms of your Mortgage
You want to consider refinancing your home mortgage if you want to adjust the terms of your mortgage. This usually refers to the length of time you will be paying an amortization. You can shorten or lengthen the terms to adjust the amount that you will be paying each month. This usually reflects a change in your life situation and your financial circumstances. If you now have more disposable income, you might be able to afford to pay a bigger amount towards your mortgage every month. You will be able to pay off your mortgage that much sooner. Shorter terms also enjoy better interest rates. On the other hand, if your financial situation is not as good as before, you might want to lengthen the term to make the monthly amortization. Longer terms do mean that the total interest amount increases, so you should be careful when making this decision.
Switching to a Different Mortgage Type
Your mortgage can either be classified as an adjustable-rate mortgage or a fixed-rate mortgage. With an adjustable-rate mortgage, your amortization will constantly change to reflect the current interest rate. Depending on the numbers, it might be increasing or decreasing throughout the mortgage period. As the name implies the fixed-rate mortgage enjoys a fixed interest rate, leading to a steady monthly payment.
If the forecast is for increasing interest rates, you might want to switch to a fixed-rate mortgage so that you can lock in the current interest rates. However, if the forecast is for decreasing interest rates, then you might want to switch to an adjustable-rate mortgage so that your monthly payments will decrease if the interest rates do decrease.
Cashing Out the Equity on your Home
As you pay your mortgage, you gain home equity, which the difference between what your property is worth and the amount you still owe in your mortgage. Refinancing your home might be able to free up some cash that you might need for various reasons. It could be a way to pay for a remodel or an unexpected repair. You can even use it to help finance your child’s college tuition.
Cash-out refinances occurs when you refinance your home loan for an amount that is greater than the balance on your current mortgage. While it will free up some cash, you take out equity, meaning you will owe less of your home as compared to before.
Combining Credit
Refinancing can be done if you want to join your first mortgage and your home equity line of credit. It has to do with the risk component. While the home equity line of credit often has a lower rate than the interest rate on the mortgages, people are now refinancing to be able to get rid of them because they are worried about stability. Home equity credit lines often have variable interest rates. You might be one of those people who worries about the probability of the rate jumping to a much higher rate five or ten years down the line. If that is the case, a fixed-rate mortgage might give you peace of mind.
Have you refinanced your mortgage? What made you decide to do it?