You must have heard of mortgage refinancing at some point or the other. It is a way of giving homeowners access to a new mortgage loan to replace the existing one. It helps in lowering the interest rate on the current loan and hence, proves to be a wise financial decision in the majority of cases.
As a homeowner, you might choose certain terms of the mortgage (loan-term and interest rate) today. But, when in the future your needs become different than they are now, refinancing can be used as an opportunity to change the terms you created for yourself way back then.
The best thing about refinancing is that you are not necessarily required to work with your current mortgage lender. You can get it from any bank you want and enjoy a brand new loan at brand new terms. However, before that, you would have to fulfil these criteria –
- Excellent credit score and payment reports
- Stable income and employment history
- Sufficient retirement assets and cash reserves
It is important to note that refinancing is a good idea only when you can reduce your existing interest rate. It not only helps you save money but also increases the rate of equity building in your home. Following are some obvious reasons for refinancing:
- To Lower Monthly Interest Payment
With mortgage refinancing, you get to avail lower interest rate loans that straightway reduce the amount of monthly payments to be paid to the lender. This neither shortens the loan term nor cashes out equity but you simply get to pay less every month and get a chance to hold onto additional money for dinners, new clothes, or a retirement or education fund.
2. To Shorten Loan Term
Homeowners may wish to refinance their existing loan for a new one not for making a change in their monthly payment, but to avail a shorter term. That helps them clear their mortgage much sooner and build equity faster. However, a downside of this is that you may have to spend more money and hurt your monthly expenses a bit.
3. To Change the Loan Type
Usually, the rate of interest offered by adjustable-rate mortgages is less in comparison to a fixed-rate mortgage. However, the rates remain low for the ARMs only in the beginning. They later increase without any prior warning. It is because of the unstable nature of ARMs, many homeowners switch to fixed-rate mortgage programs and refinancing in such cases sounds like a safer bet.
4. To Consolidate Debt
Debt consolidation is a big reason for which homeowners opt for refinancing. The money from cash-out refinance can be used to pay off credit card bills and other debts. This also aids in reducing interest rates thereby saving money spent on monthly installments along with relaxing on your taxes.