Are you wondering how you can refinance your mortgage?
From lowering your monthly payment to changing the interest rate structure, there are many reasons why you might want to refinance a home loan. When done right, it can certainly be a smart financial move.
Let’s get started!
What is mortgage refinance?
When you refinance your mortgage, this means that you get a new mortgage to replace your current one. It allows you to change the terms of the loan, including the interest rate and monthly payment. A popular type of refinance is known as a cash-out refinance, which you can use to get some cash in exchange of your home equity.
Benefits of mortgage refinancing
Reduce monthly payment
One of the more obvious benefits of refinancing a mortgage is the ability to reduce your monthly payments. You can do this by either securing a lower interest rate or extending your loan term. This is a great solution if you are experiencing some difficulty making the monthly payments.
Pay off your loan faster
On the other hand, if your finances have recently improved and you can afford to pay more per month, it’s a good idea to shorten your loan term. Changing from a 30-year to 15-year plan will help you save on interest in the long run and pay off the mortgage faster.
Remove mortgage insurance
Another reason to refinance your home loan is to remove the mortgage insurance premium, especially if you had to pay it because you made a small down payment. So, if you now own more than 20% of your home equity, it’s possible to refinance into a new mortgage without the insurance. But if you have an FHA loan, the only way to eliminate MIP is to change to a non- FHA loan.
Tap your equity
Lastly, a cash-out refinance is a way to refinance your loan while taking out some cash from your home equity. Make sure that you own at least 20% of the equity! This type of refinancing can be useful if you have other projects you need to fund or other financial goals to achieve. It’s a little bit like getting a low-interest loan.
How to refinance your mortgage
- Identify your goal, Before you even start applying for a refinance, it’s important to know what your goal is. Are you looking to get a lower interest rate? Lower monthly payments? Shorter loan term? Or do you need to tap the equity for some cash? Knowing your reason will help you find the best deal for you. You should also think about the trade-off. For example, if you want to pay less every month, you will end up paying more over the length of your loan in interest.
- Check how much equity you own, The next thing to do is find out how much of your equity you own. This is because you can’t refinance if you still own none of the equity. Some conventional loans allow you to do that with as little as 5%, although having a minimum of 20% can ensure that you will get better rates and lower fees. Plus, when you own more equity, the loan becomes much less risky for the lender. To find out your equity, simply subtract the amount that you still owe from the value of the property. This difference is what we call the amount of equity you own.
- Compare multiple lenders, Once you know why you are refinancing and your equity share, it’s time to shop around by comparing a few different lenders. Consider looking at three or more to make sure that you can find the best possible deal.
- Pay the closing fees, Last but least, the closing fees of a refinance is much like your first mortgage. It is always best to pay any costs upfront as this will prevent you from paying more in interest rate!
Risks of mortgage refinancing
Unfortunately, refinancing your mortgage does not come without risks. But these shouldn’t put you off—they simply mean that you have to be careful and think carefully before making any big financial decision.
The most important disadvantage is that refinancing may cost you some money which include everything from appraisal and title insurance to the origination fee. Moreover, some lenders may even charge a prepayment penalty for paying off your loan earlier. So, if this is what you want to do, make sure the penalty doesn’t exceed the amount of interest you can save by shortening the loan length.
Should you refinance your mortgage?
All in all, if you have considered the above risks before refinancing, it may be a good idea torefinance. Especially if you are looking to change the terms of your loan! With that said, we wish you the best of luck in your refinance journey.