Having a mortgage is a convenient means to house ownership, but situations might arise to make it feel like a burden or an overpriced decision. Refinancing your mortgage becomes vital in times like this. Mortgage refinancing involves replacing an existing mortgage with a new one with better terms to improve your finances. It is considered a way to save money, but might not be suitable for all, hence the need to be aware of signs that point towards refinancing your mortgage.
1. Relatively Higher Interest Rate
For a couple of years, mortgage interest rates have been low; the rate people acquired a mortgage ten years ago might be higher than the current interest rate. If you have a substantially higher mortgage rate than people in your environment, you should speak to a lender for refinancing. If your mortgage is not old, but you consider the interest too high for your current financial status, you should also consider refinancing. With a higher interest rate comes an increased payment of a loan in the long run. Even a 1% reduction can save you a great deal of cash. There is a chance of ending up with a higher loan amount than initially acquired if you don’t go about the mortgage refinancing right.
2. Loan Terms
A loan term is a duration for which you are to make monthly payments to repay the loan. A loan term could be short or long, and the need might arise over time to alternate from one duration to another. Each loan term has its benefit; shortening your loan term will increase your monthly payments, reduce your interest and shorten the duration of fully owning your home debt-free. A longer loan term will reduce your monthly payment but will elongate the duration of the loan payment. The desire to be house debt-free fast and reduce your monthly payments are indications for refinancing your mortgage.
3. Improved Credit Score or Income
Credit score and income are vital for the determination of mortgage interest rates. A higher credit score or income guarantees a lower interest rate. Increasing your monthly income or improving your credit score will not make your original lender automatically change your mortgage because the mortgage has been locked in. The best way to attain a reduced interest because of your income or credit score is to refinance your mortgage.
4. Swapping Adjustable-Rate Mortgage with Fixed Rate
An adjustable-rate mortgage is a house loan with a constantly changing interest rate over the loan duration. It mostly starts with a five to seven years fixed interest rate, after which the rate becomes variable depending on the market condition. Fixed-rate has an interest rate that remains the same over the entire loan term. While an adjustable-rate mortgage allows you to pay off your loan fast or sell the house quickly, it might not be the best suit if you don’t like fluctuating payment rates or if you are scared of a payment rate beyond your means and want a well-planned budget. In this situation, the best way to change from an adjustable-rate to a fixed one is through mortgage refinancing.
5. Increasing or Overwhelming Debts
Accumulating debts can take a detrimental toll on your finances and health, and in situations like this, keeping up with mortgage payments can be overwhelming and impossible. Refinancing your mortgage will enable you to lower your interest rate and get liquid cash from your home equity to sort out other financial challenges. You can use the money from refinancing to pay off high-interest loans like credit card debts, which will save you money in credit card interest.
6. Need for Home Improvements
The home equity loan, cash-out refinances acquired from refinancing can be used to finance your home improvements or repairs like remodeling, home additions, and energy-efficient improvement. Some lenders allow you to borrow up to 80% of your home value for homeownership and improvement. Cash-out refinance allows for a single mortgage payment for 15 to 30 years, while home equity is considered a second mortgage, with a separate payment plan of 5-15 years’ term.
7. Increased Home Value
If your property value has gone up because of your locality or home improvements, you might want to consider refinancing your mortgage. It is more useful when you require the consolidation of high-interest debt. With an increased home value comes increased home equity and higher borrowing power.
8. Close to Retirement
It is a personal situation refinancing decision. If you are close to retirement and making your mortgage payment will not be challenging upon retirement, you do not need refinancing. But if you still have many years left in your mortgage payment and don’t have any other source of income except pension after retirement, you should reconsider refinancing your mortgage. Refinancing will enable you to comfortably make monthly payments at a lower rate with a reduced income.
9. Plan for a Long Time Home Stay
The closing cost of houses makes it difficult for most people to start saving within months or years of acquiring the house. If you plan to stay in the home for a short while (moving or selling), it is advisable to stick with your mortgage plan. If you intend to live there for a long duration, then you should consider refinancing your mortgage. The cost to refinance your house might appear high, but in the long run, you’ll get the opportunity to save more over time.
10. Dissatisfaction with Current Lender
Owning a person does not mean you have to stay with the individual even when you are distressed, unhappy and dissatisfied. If you feel a lender is not treating you fairly (in terms of benefit or customer’s experience), you are free to change your lender. This change can only happen with mortgage refinancing. You can look for a mortgage plan with better benefits, interest rates, terms, and customer experience.
Refinancing a mortgage is not a decision to make hastily; you need to identify why, do your research and understand your financial position. You can seek help from financial and mortgage consultants to avoid costly mistakes. This page will enlighten you on mortgage plans and refinancing that will be beneficial for your situation. It is necessary to know that refinancing is not for all.