The word ‘mortgage’ translates from the French to ‘death pledge’, and I think we can all agree that this is an apt description of one. For many, it’s the deadliest sword of Damocles hanging over our heads, a lifelong commitment to paying for your house. It can certainly feel like a death pledge sometimes! Unfortunately, we aren’t among the obscenely wealthy few who can pay for a house completely out of pocket with a giant bag of cash. Mortgages are just a fact of life for the vast majority of us if we want to own a home.
There may come a point when you decide to refinance your mortgage. For most homeowners that’s a fantastic idea! These days, it’s easier than ever to do so – provided you know what you’re doing in the first place. This article will help you figure out if mortgage refinance is right for you, and how you can go about doing it if you decide that it is. The process may be simpler these days, but getting started can be a hassle. That’s why we’re here to help. Read on to see if it’s right for you.
Why Should I Do It?
There are two major reasons to refinance: to save you money, and to free up funds to handle an emergency. The first reason is a smart financial choice, while the second may be a last resort option that ends up costing you money in the long run. Let’s go over the first option. The process essentially replaces one home contract with another. You’re essentially taking out a new loan through a lender, who uses the money of that loan to pay off your original home debt. Now, you’re basically paying off the new contract instead. This has a ton of advantages, but the major one is that doing so can lower your interest rate by a fairly substantial amount. Additionally, you may even be able to negotiate a lower payment each month, or even a shorter term than your original contract. This is also useful for switching from adjustable rate to fixed rate interest, and vice versa.
The second reason to think about it is to tap into your home’s equity for what’s called a cash out refi. Under normal circumstances, you never actually see the money that goes into a refinancing. As you can see here, it’s all handled by the lenders responsible for the process. With a cash out option, you borrow against your home’s equity to get the money yourself. This option is there for people who are in a dire financial emergency who need a lot of money very quickly to cover a massive bill, such as a debt, medical bill, or other expense. This option should only ever be used if there are no other recourses available, as it comes with some significant downsides. It can, of course, lower the equity in your home and end up with a more expensive mortgage overall.
How Do I Do It?
The process is fairly simple, if not a little involved. Once you’ve determined what exactly you’re going for, be it a lower interest rate or a cash out option, your next step is to start looking around for lenders that can meet those needs. One of the things to keep in mind, as you can see at https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/, is that there will be lender fees associated with the process. Try to get a lender with the lowest possible fees, of course, but bear in mind that your long term goals are more important than the short term fees.
Applying for new loans will affect your credit score, so you’ll want to select three to five lenders to apply to and do so within two weeks. Once you’re approved, you’ll work with your lender to figure out a new interest rate. Papers are signed, closing costs on the loan are paid, and everything is good to go. You may recognize the process as being similar to the initial borrowing process for when you first bought your home. Overall, refinancing can be a great choice for a lot of reasons. If you think it’s right for you, now you have a good starting point.