When Refinance Mortgage Is the Best Option
Refinancing your mortgage refers to taking out a new home loan. Your new mortgage lender will make payments to your old loan, which means you are now in agreement with the new lender. Considering how low the mortgage rates are now, refinance mortgage can make sense. The process of refinancing works the same way as your first mortgage application. Spend some time to know your loan options. Before getting approved, gather the necessary financial documents and apply for a mortgage refinancing.
What Is Refinance Mortgage?
Refinance mortgages are available in three forms; purchase, cash-out, and rate-and-term. The refinancing that is ideal for you depends on your personal circumstances. People usually opt for refinance mortgage as a way to reduce the interest rates, to lower monthly payments, or change the program from an ARM to a fixed-rate mortgage. On the other hand, some people need additional cash to be able to pay off debts, fund home renovation projects or leverage the home equity to get a cash-out refinance.
Factors to Consider When Refinancing
How much will it cost you to complete the refinancing? You may pay a few hundred dollars, or about 2 to 3% of the value of the new loan to finish refinancing, depending on the loan terms and the mortgage lender. If you think the refinance can cost you about $3,000 to finish, it is probably not a good idea, as it may take approximately four years to regain that amount. On the other hand, if you need to pay only $1,000, it may be worth paying that amount over time, particularly if you have no plans of selling your property anytime soon.
How long do you plan to reside in the house? One good reason to choose a refinance mortgage is that the minor changes in your monthly payments and costs of interest can escalate to big savings over time. So, if you plan on selling your house in a couple of years, it may not be practical to pay the costs in refinancing.
Are you in need of more cash flow every month? Refinance mortgage can change how much you pay every month. Depending on the terms you pick, the payment can get lower or higher. If you desperately need some room in your budget, it is suitable to refinance by paying a lower monthly mortgage rate. Make sure you do not free up funds towards your goals. Also, avoid making the mistake of refinancing, reducing the payment, but does not have a clear plan of what you are doing with those new freed up money every month.
How old will you be when you pay your mortgage is full? Know that when you opt for a refinance mortgage in a new 30-year contract, it means that the clock will restart until you are free from mortgage. So, if you are already eight years into your loan, think carefully if you want to start over again another 30 years. It is particularly true if refinancing means you would be carrying debt into your retirement years. While it is possible to pay more than your monthly minimum to reduce the repayment term, think about this carefully as well. Another option is to refinance a 15-year loan.
Refinancing Requires Some Paperwork
When you do a refinance mortgage, you are setting a new loan with new terms. In general, this causes a refinance applicant to undergo the same approval process as with a purchase applicant of a mortgage. A refinance applicant is typically evaluated in these common areas:
Employment and Income History
Payment History and Credit Score
Cash Reserves and Retirement Assets
In addition, the property that undergoes refinancing is subject to an appraisal, just like a home purchase. This is to help declare the current market value. While there are similarities, the applicants for refinance mortgage need to submit less documentation compared to purchase applicants. Usually, you need to provide residency status or proof of citizenship, proof of assets through bank statements, proof of income with pay stubs and W-2s.
Benefits of Refinance Mortgage
Change from an adjustable-rate mortgage (ARM) to a fixed-rate home loan. When using an ARM, your payment can rise or fall depending on the condition of the interest rates. If you change to a fixed-rate loan and a stable monthly payment, it offers you a guarantee that your payment will not change.
Lower monthly payment. Some studies have shown that a homeowner can save up to $160 each month if they choose to refinance mortgage. By having a lower payment per month, you can put the savings to other uses such as debts and expenditures. You may also use that savings to your mortgage payment, which can help pay off the mortgage sooner.
Get rid of private mortgage insurance. If your principal has been paid off and has enough home appreciation, then you do not need to pay your mortgage insurance, significantly lowering the total monthly payment.
You can use home equity to take out money. Considering the increase of home values nowadays, there may be enough equity in your house to get a cash-out to refinance. You can use the money to fund your home improvements, finance big purchases, or pay off debts.
Lessen the length of the mortgage loan. If you have obtained a home loan during the early stage of your career, having a 30-year term may have made a sound financial sense. However, if you want to complete your loan sooner, a good option is to reduce the term of the loan.
Combine first mortgage and HELOC (home equity line of credit). If you consolidate them into one monthly payment, it helps simplify your finances, as you only need to focus on a single debt. Home equity line of credits often come with adjustable rates, so opting for a refinance mortgage can save you money down the road.
When it comes to financial decisions, it is essential to look at your current situation and determine what term makes the most sense. There are mortgage calculators that you can use to work out the best rates for you. Most importantly, consider the factors above to decide if a refinance mortgage is worth your money and time.