If you have been a homeowner for a while, you have probably heard of a phrase ‘mortgage refinancing’. There are many advantages to why you would want to refinance your mortgage. However, there are some bad sides to this process as well, so you should be cautious.
Refinancing your mortgage means getting a new mortgage to replace your original one. This is done to allow the homeowner to obtain a better interest term and better rate. When the first loan is paid off, the second loan can be creating, which can make for a better terms than simply throwing out the old mortgage and making a new one. This is great for homeowners with great credit score, but for others it can be risky. Below you can read about some important steps of mortgage refinancing and when you should and shouldn’t consider it.
Why You’d Want to Refinance Your Mortgage?
When you make your monthly mortgage payments, that money goes to the homeseller. When you refinance that mortgage, you get a new one and this mortgage pays off the balance of the old loan. Keep in mind that, when refinancing your mortgage, you once again have to apply for a loan and to meet the same requirements as before. In other words, you still have to file an application, do the underwriting process and close the deal, just as the initial time.
Reasons Why You Should Refinance Your Mortgage
There are several reasons for you to refinance your mortgage. We’ll go over just a few of the most common ones.
Secure a lower interest rate
This is the most common reason why homeowners want to refinance their mortgage. For this to be possible, the interest rates have to drop. Ideally, you’d want them to drop by 2% or more, but some lenders consider 1% to be enough.
Shorten the term of the loan
Sometimes, when interest rates fall, homeowners can have the opportunity to shorten the terms of the loan without much change in the monthly payment.
Convert the type of your mortgage
The mortgage can be adjustable-rate mortgage or fixed-rate one. Adjustable-rate mortgage can offer lower rates, but the adjustments can make it end up being more expensive. On the other hand, fixed-rate mortgages are safer, but if the interest rates are falling they might be the worse of the two. Depending on your circumstances and situation, you might want to convert your mortgage type. This can be done when you refinance your mortgage. Just make sure that you have a good knowledge of the current state of the market.
Another reason why you might want to refinance your mortgage is to tap equity or consolidate debt. Homeowners tend to tap their equity to cover major expenses or to pay off some big debt. This can be justified by claiming that the remodeling adds value to the home, or that the interest on mortgages is tax deductible. Keep in mind that this might not always be a good option, as prolonging the payment of your debt usually isn’t a smart financial decision.
Getting rid of a FHA mortgage insurance
In most cases, if you have a private mortgage insurance you can cancel it without too much trouble. Getting rid of the insurance given by the Federal Housing Administration is a harder task. In fact, the only way to get rid of it to sell your home – and the fastest way to do so is to contact a direct buyer – or to refinance the loan in the moment when you have enough equity.
Should You Refinance Your Mortgage?
With everything that’s been said, is it smart to refinance your mortgage? The usual goal of refinancing is reducing your monthly payment. This is tempting, but you should always ask yourself are you ready to take another 30 years of loan. In the long run, this usually means that you will end up paying more in interest rates.
If you want to know whether or not it would pay out for you personally to refinance, you should check some of the many refinance calculators that are available online.
Are there Better Options?
If you want to do anything from the above list, know that there are better ways to achieve your goals.
First one is to ask your lender to change the terms of your loan. For example, you might ask your lender to change the size of monthly payments. This way you will pay less for a longer time, just as you would when you’ve refinanced your mortgage. Also, this might also help you reduce the interest rate, all without the hassle of going through another mortgage application process.
Another good option is to sell your house to a local direct buyer, such as Sparks Property Investors LLC. We will buy your unwanted house for as quickly as 7 days and we will pay you in cash. This can help you purchase another home with a mortgage terms that are better suited for your needs, as well as help you get rid of a FHA mortgage insurance. Also, this way you don’t have to worry about additional expenses such as closing costs or commissions. Not only that, but this way you aren’t required to have a high credit score. In short, selling your house to a Sparks Property Investors LLC is way less risky than trying to get better mortgage terms when you refinance.