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 lower the interest rate on the current loan and proves to be a wise financial decision in most cases.
You might choose certain mortgage terms (loan term and interest rate) today as a homeowner. But, when your needs become different in the future, 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 new loan at new terms. However, before that, you would have to fulfill 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 helps you save money and increases the rate of equity building in your home. The following are some obvious reasons for refinancing:
1. To Lower Monthly Interest Payment
With mortgage refinancing, you get to avail of lower interest rate loans that directly reduce the number of monthly payments to the lender. This neither shortens the loan term nor cashes out equity, but you 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 to change their monthly payment, but to avail a shorter term. That helps them clear their mortgage much sooner and build equity faster. However, a downside is that you may have to spend more money which hurts your monthly expenses.
3. To Change the Loan Type
Usually, the rate of interest offered by adjustable-rate mortgages is less than a fixed-rate mortgage. However, the rates remain low for the ARMs only in the beginning. They later increase without any prior warning. 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. Cash-out money 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 and relaxing your taxes.
