You have probably heard about mortgage refinancing, but do you know what it really means? More importantly, is it something you should do?Though refinancing can have lots of advantages, you should know how it will impact your personal financial situation. After all, a mortgage refinance still comes with some costs, so it’s important that the benefits outweigh the costs!
What is mortgage refinancing?
When you refinance a mortgage, you’re essentially getting a new mortgage to replace your current one. It will be an entirely new loan with a different term and interest rate, and lenders will look at your credit score before approving or rejecting your application.
Why you should consider refinancing your mortgage
1. Lower interest rate
One of the most common reasons to refinance a mortgage is to get a lower interest rate. When the market for mortgage rates decreases, it may be worth refinancing as it might help you save money in the long run.
2. Shorten loan term
Other than lowering the interest rates, you can also refinance to shorten your loan term by increasing the monthly payments. This is a good option if your finances have improved and you can afford to pay more every month, which means you’ll be paying less in interest overall.
3. Lower monthly payment
In addition to changing your rate and loan term, refinancing also allows you to lower your monthly payment. Of course, this is in exchange for either a long-term or higher rate. It all depends on your specific circumstance and what exactly you’re looking for with a mortgage refinance.
4. Cash out your equity
Another major benefit of refinancing is the ability to tap your home’s equity in exchange for some cash. This is known as a cash-out refinance, which is a little like borrowing money with very little to no interest. The great thing about cashing out your equity is that you can use the money for other financial goals, including paying off debts with a high-interest rate.
5. Remove PMI
Finally, refinancing your mortgage is also a popular way to eliminate your private mortgage insurance. Let’s say you could only afford a small down payment when you first applied for a mortgage, which was why you had to pay for PMI.But now that your finances and credit score have improved, or once you have accumulated enough equity (usually at least 20%), you can use a refinance to get rid of the premium.
Should you refinance your mortgage?
All in all, refinancing is often a good idea if you know you’ll benefit from it. You should refinance your mortgage if you want to lower your interest rate, change your monthly payment or loan term, get some cash from your equity, or remove your mortgage insurance.However, before you decide on refinancing, make sure to carefully consider your options and calculate if the benefits you enjoy will outweigh the costs. Remember that you still have to pay closing fees!