The largest purchase most people will ever make is the purchase of their home. In many cases, this purchase will require you to take out a mortgage. Mortgage loans require you to make payments for a fixed amount of time at a certain rate of interest for the money borrowed. When taking out a mortgage, the homeowner gives the lender full rights to collect payments on the loan and even foreclose on the property if payments are not being paid.
Mortgage refinancing allows homeowners to take out another loan on top of the current mortgage loan in order to free up money or to obtain a better interest rate on the mortgage. Taking out the additional loan on your current mortgage may seem like a good idea to homeowners: pay off the older loan with the new loan. However, there are things to keep in mind when considering a
mortgage refinance.
There are many factors involved when determining your mortgage rate, or the interest you pay on the mortgage. Your credit history, the amount of down payment, and the current mortgage are just a few of the many aspects of the mortgage rate. Keep in mind that having a good credit history results in a lower interest rate.
Types of mortgage loans
There are different
types of mortgage loans available to future homeowners. Mortgages may vary by length, style, down payments, and special programs. You are able to take out a mortgage with a loan length of 15, 30, or even 40 years. Mortgages can be fixed rates where the payments remain the same over the life of the loan, or adjustable rate where the rate may be lower the first few years and then increase to a higher rate. Although some require a certain percentage down, other mortgages allow you to finance 100%. Some mortgages even have special programs available for first-time home buyers.
Reasons to refinanceRefinancing allows the homeowner to apply for a new loan to pay off the original mortgage. By refinancing and receiving a new loan, the homeowner now has the capability to pay off the already existing loan and focus on paying off the new loan.
You may want to consider refinancing if your credit history has improved for the better. An improved credit history may allow you to qualify for a lower
mortgage rate. You may also refinance if you need extra cash, such as for debt consolidation or helping fund college for your children. If refinance rates are lower than the terms of your original mortgage, you may want to consider mortgage refinancing
If you are having difficulty making payments because of income changes or rate increases due to the terms of your mortgage, refinancing may be an option. Mortgage refinancing may allow you to reduce payments by obtaining a lower mortgage rate. This will help keep you away from the threat of foreclosure. By increasing the amount of the loan, you can pay off the original mortgage and receive funds to use for other purposes.
Refinance expensesWhen refinancing, make sure that the refinancing mortgage rate is lower than the original rate to cover expenses involved in the mortgage refinance. The expenses—including points, title search, and attorney’s fees—must be paid by you. They may be paid up front, but in some cases can be included in the new mortgage. When comparing mortgage rates, you should use 1% as a guideline. If the refinancing mortgage rate is not at least 1% lower than your original mortgage, refinancing may not be the best option for you.
You should also consider how much longer you plan on living in your current home. If you are planning to sell your house in a couple years, it probably will not pay to refinance. However if you are planning to stay living there for the next several years, it may pay to refinance.
The
benefits of refinancing are strong, but always remember to calculate any additional costs when refinancing to make sure that refinancing is the best option for you.