A home mortgage refinance is a fantastic way to take out a new mortgage and then use the proceeds to repay your old mortgage. The actual term “refinance” may make it sound as though you are somehow reworking your old mortgage, but in reality you are simply trading the old one for a new mortgage. There are many reasons why someone may wish to refinance their mortgage and these include:
Taking advantage of lower interest rates which will reduce your current monthly mortgage payment.
When you initially took out your mortgage factors such as your credit rating and the amount of down payment available would influence the interest rate you would have been offered. However, if interest rates are now lower or your financial circumstances have improved since then, you may be the ideal candidate for refinancing.
With that said, knowing exactly when you should refinance, the specific route you should take, and the potential benefits, can be somewhat confusing. In fact, many homeowners are intimidated by the process, as they are still in shock by the process they underwent to get their mortgage in the first place.
There are also substantial costs involved, and therefore it is important to consider whether refinancing is actually worth it. It must be said that refinancing will typically provide long-term benefits, and therefore if you are expecting some kind of short-term gain you may be very disappointed.
So, when exactly should you refinance?
As mentioned, it is important to calculate whether a refinance is worth it in your current situation. There are numerous refinance calculators available online which can help you make this decision. You will need to consider exactly how long it will take to recoup the expenses of refinancing, and therefore how long it will take for you to break even.
Possibly the biggest benefit of refinancing will be obtaining a lower interest rate and lower monthly payments. You may find that when you applied for your original mortgage that your personal finances and the financial environment at the time did not allow you to qualify for the best rate.
However, you would hope that since then your credit rating and finances have improved and market interest rates would have fluctuated in favor of the consumer. This will then mean that you should be able to obtain a lower interest rate on your mortgage and also a lower monthly payment.
Another reason people look to refinance is to shorten the term of their mortgage. This will mean that less money is paid towards interest and you can pay your mortgage off faster. You will generally find that lenders are willing to offer far more favorable terms and interest rates to a borrower who has a shorter term mortgage. This will essentially mean that there is less risk for the lender.
Many people start off with a 30 year mortgage, but as their lifestyle and finances improve with time, they may look to decrease the term to 10, 15 or 20 years. If the refinance interest rate is lower than previously, you may even be able to maintain the same monthly mortgage payment, even with a shortened term.