Mortgage refinancing is all about looking at your options to continue paying a housing loan. Whether to stick with your original lender or to search for several more choices to compare rates, benefits, and risks.
More often, mortgagors tend to stick with their original lenders, closing on their options to haggle or to shop because for them it is convenient that way. However, an informed homeowner knows that there is more benefit than having no option at all. And that knowing the right reasons first why you need to refinance your mortgage is of importance before you cross the line of refinancing.
To begin your journey, we’ve listed you 10 good reasons as to why mortgage refinancing is a wise option for you. As you read, assess which ones apply to you and match with your financial goals.
1. Get a lower interest rate
The possibility of getting a lower interest rate is always at bay, waiting to get preyed at. Knowing and seeking the market will give you a clue on the movement of interest rates. If interest rates have gone down since you took out your original mortgage, you may be able to obtain a mortgage with a lower rate and doing so will also lower your payment installments. You will have to be aware, however, that this may reset the term of your mortgage, but a shorter-term can be arranged to match your specific needs.
2. Improve your borrower profile
If you have cleaned up your credit and improved your credit score since you got your last mortgage or the value of your home has risen, you may want to consider a refinance as these may qualify you for a lower interest rate. A good credit standing is welcome to lenders and much valuable options can be presented to you.
3. Change your mortgage term
You may have started with a long mortgage term because at that time that’s the most logical thing to do given your finances. Time passes and you are able to pay off your debt. You will realize that you are getting more capable of paying your loan and is slowly learning the ropes of mortgaging. A shorter loan term is becoming an option.
Why not? If you are looking to pay down your mortgage more quickly, you may want to refinance from a 25-year fixed to a shorter term, such as a 15-year fixed. Mortgages with shorter terms might have higher payment amounts but have lower interest rates. It is savings off your pocket in the long run and you will realize, it’s a lot.
Conversely, you may also consider refinancing to extend your mortgage term. Doing so would cost more in interest over the full amortization of your mortgage, but it would also make the payments a lot lower.
To shorten or lengthen your loan will largely depend on your current financial capacity and goal.
4. Change your mortgage type
If you are currently in an adjustable-rate mortgage (ARM), you may consider switching to a fixed-rate mortgage if you think interest rates are going to rise. Alternatively, if you are in a fixed-rate mortgage, you can switch to ARM rate mortgage if you want some payment relief or if you feel you are overpaying.
Another common situation that can arise is if you are in an interest-only mortgage that is nearing the end of its term. Refinancing into a more conventional mortgage at this point can save you renewal fees and provide a lower interest rate. On the other hand, you could consider refinancing from a conventional mortgage to an interest-only mortgage. Doing this can improve your monthly cash flow, allowing for other expenditures or taking advantage of investment opportunities.
Choosing the right mortgage type is like playing a tactical game. You should choose the right strategy at good timing. Only by refinancing that you are given such option to play your cards in mortgaging.
5. Access cash
Refinancing is a great way to utilize the equity from your home. Many clients chose to do this for home renovations, purchasing an investment property, investing in the stock market, or when simply in need of cash.
A cash-out refinance works by refinancing your mortgage for more than you owe and takes the difference in cash. For instance, your home bought 5 years ago now values at $300,000 and your remaining payment is now at $100,000. The amount difference can be therefore taken out as cash.
6. Buy someone out
Also known as mortgage buyout. A solution to removing or adding someone to the title or to the mortgage. Normally, this happens when there are possible disputes over a home or a mortgage due to the ceasing of marriage and partnership. As they say, nothing lasts forever, so you’d better have this option of refinancing your mortgage.
This works by buying the co-owner’s share of the property’s equity, so that said person can be released from the mortgage and removed from legal documents as owner. Refinancing can provide access to the cash for a buyout.
7. Consolidate multiple mortgages
If you have multiple mortgages on your property, you can refinance to combine them into one. This can also be a great way to lower your interest rate, as many second mortgages have much higher interest rates associated with them.
This can be considered as a cash-out refinance because you’re actually buying a second mortgage. For example, you have two mortgages, one has bigger equity than the other. By consolidating, you will refinance the home with bigger equity to pay the other home. In essence, you will be owing to a single mortgage that is larger, while the other property is already debt-free.
Homeowners do this when they studied that paying a single mortgage loan is wiser than paying two separate loans. However, expect a higher interest rate and stricter lending measures.
8. Consolidate other debt
If you have other debts, such as high-interest credit cards that are carrying balances every month or high-interest vehicle payments, you may want to consider refinancing your mortgage. The interest rate you will be able to get on your mortgage will be a lot lower than the other debts previously mentioned here, allowing you to save money on the interest you were paying before. This can also greatly improve your monthly cash flow, easing the pressure of multiple payments every month.
Debt consolidation is combining all your debts into one loan, therefore, acquiring a single interest rate in one regular repayment. This ease of your burden from multiple debts.
9. Special offers
If a specific lender is offering a special promotion for a limited time only, you may consider refinancing to your advantage and if it makes sense for your current needs. However, take special offers and programs with a grain of salt. Make sure to study it and how it will favor your mortgage.
10. Safety net
If you are currently in a position where you could qualify to refinance your home, there is no guarantee that you will be able to do so in the future. Your circumstances may change and you may run into some financial hardship causing you to become unable to qualify at some other time. Taking advantage of a current refinance option might easily qualify you and would also let you negotiate better terms for your mortgage.
Refinancing your mortgage is indeed a good option to resolve your various financial needs and preferences. On the other hand, if not done wisely and correctly, it can be a pitfall to more financial disarray. But with refinancing, you can explore the many options available. Braver, you can play the strategy game of mortgaging and lending.
Daisy Raouph, CLU, CHS, specializes in mortgage financing solutions and financial services. A Mortgage Broker and Financial Security Advisor with over 30 years of experience in financial services. Contact us today to review your mortgage financing options. We can help!