Refinancing your home shouldn’t be daunting or intimidating, especially when it’s the soundest decision to make in a given situation. Most people hesitate when considering refinancing, probably because they don’t have access to enough information to be familiar with it.
Refinancing your mortgage isn’t necessarily a bad idea. However, there are some situations where refinancing may do more harm than good—knowing which is which will ensure that refinancing will work for your benefit.
What Exactly Is Refinancing?
Before we delve deeper into determining whether certain financial situations demand refinancing, let’s define it first. Refinancing is replacing an existing loan with another, usually with more agreeable terms than the first loan. In obtaining another loan, you get to pay off your existing loan earlier than scheduled.
Borrowers can refinance an auto loan, a home loan, or other types of loans. Refinancing is often done to make beneficial changes to the borrower’s interest rate, loan term, and other terms in their existing loan. It’s also done when borrowers would like to lessen their monthly payments, consolidate their debts, and get cash on hand.
How Does It Work?
In order to apply for refinancing, you can go to your current loan’s lender and request to have your loan refinance. Or, you can also go to a new lender and request a new loan application. It’s highly suggested that you ask and look around for lenders who have better terms before applying for refinancing. Since the goal of every borrower looking to refinance is to get a new loan with better terms.
Once your refinance application has been approved and the closing process is completed, your current debt will be paid off entirely by your new loan. Then, you make payments to your new loan until you pay it off entirely, or you refinance it as well.
Borrowers often turn to refinance to get better loan terms and rates. Some of the scenarios where borrowers get a better loan term and rate would be when their credit score has improved or when the current market offers lower interest rates than when you signed up for a loan.
When to Refinance and When Not to Refinance
One of the situations where refinancing is a better option is when it’s possible to reduce your interest rate by 1% or more. Not only does it save you a lot of money, but it also allows you to build equity on your home quickly.
Decreasing interest rates can also be an opportunity for you to switch from a fixed loan to an adjustable-rate mortgage (ARM). However, if the mortgage rates’ trends are going up, it would be best to switch from an ARM to a fixed-rate loan.
Closing costs are usually between 3% and 6% of the principal amount of the loan. That’s why closing costs is also one thing you have to consider when planning to refinance.
Another scenario where refinancing makes sense is when you plan to stay at your home for several more years. It takes many months to several years before you start saving money from refinancing, so if you’re planning to sell your home, it’s better to opt out of refinancing.
If refinancing will enable you to remove private mortgage insurance (PMI), then it would be a sound financial decision to refinance for that sole purpose. Removing your PMI will help you save a lot of money in the long run. If you want to know more about the pros and cons of refinancing, Pros and cons of refinancing a mortgage is a good read.
Depending on the situation, refinancing can be advantageous . However, most borrowers aren’t familiar yet with the benefits of getting a refinance. Getting a new loan to pay off your existing loan may sound like a bad idea for some, but refinancing is more than that. In a way, it seemingly gives borrowers a second chance to get a better loan term and rate.
If you have more questions with regards to refinancing, we’re here if you need us. Reach Home Loans is one of the leading mortgage lenders in Florida. We offer the best rates accompanied by stellar customer service. Learn more about us at https://www.reachhomeloans.com/ or call us now at 954-703-1465 to get started.