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Your decision to refinance your loans depends on whether the new mortgage improves your financial situation. People refinance for different reasons, some of which are smarter than others. The process can cost thousands of dollars initially due to the origination fees, title search, appraisal, and other charges. Let's look at some of the most compelling reasons for mortgage refinancing.
1. To Access Lower Interest Rates
If you find a lower interest rate than what you are currently paying, refinancing may be a fantastic move. Some lenders suggest that at least one percent reduction is enough of an incentive.
When the interest rate drops, you can reduce your monthly installments significantly. You pay less in the long run and accelerate the pace of building equity on your home.
Strategies for Shortening a Loan Term
A considerable fall in interest, say from nine to five percent can reduce a 30-year fixed-rate loan by almost half. It can happen with a negligible adjustment on the monthly payment.
You can switch from an adjustable rate (ARM) to fixed rate interest mortgage and vice versa depending on some conditions. Some ARMS, for instance, begin at favorable rates but soar through the loan term to exceed some fixed rate options. When this happens, you should convert to a fixed-rate mortgage and eliminate your worries about future increments.
On the other hand, shift to ARM from a fixed-rate mortgage if there is a trend of falling rates in ARM. The strategy is ideal if you don't intend to keep the home for long since the ARM might soon change to your disadvantage.
2. To Tap More Equity
By reducing your mortgage term, you gain equity faster, and you can access it to cover significant expenses. They may be home-related such as remodeling or other costs altogether.
When used this way, refinancing is justifiable if the interest rate is lower than what you can access from other credit sources. It's also viable if you consider the value added to your home after a renovation.
3. To Consolidate Debts
Refinancing can be a strategy for consolidating debt. It works by replacing high-interest debt with a more favorable rate mortgage. However, it's advisable to refrain from overspending after offsetting your debt lest it becomes a habit.
4. When You Qualify to Refinance
Though mortgage refinancing is reasonable in many situations, you have to meet some conditions. Having a mortgage is not enough.
It's essential to understand underwriting. The bank will examine your credit score, income, and the amount of equity you have in the home.
Your lender will compare your loan against the value of your house before granting a refinance. They will also want a creditworthy person who earns enough to afford the monthly installments under the mortgage.
5. When You Are Keeping the Home
Don't refinance if you are planning to sell your house in a few months. The reason is that refinancing has costs that can take you years to recover. Your mortgage lender can help determine the time you will begin saving money.
The Takeaway
One of the most popular reasons for refinancing a mortgage is reducing the interest rate. It comes with perks like a shortened loan term and an increased rate of building equity on a property.
If well-calculated, you potentially pay less money than in the reason first mortgage. Home equity also helps you to access funding for other expenses.
Before refinancing, ask a financial expert to elucidate what you could gain or lose.
Contact us at First Savings Mortgage for mortgage loans, refinancing, or questions.
Please note, by refinancing your existing loan, your total finance charges may be higher over the life of the loan.