Refinancing refers to replacing an existing mortgage obligation with another one but under different terms. These terms may vary depending on the State of residence or country. The new terms and conditions are affected by political stability, economic conditions, bank regulations, borrower’s credit rating, currency stability and risks. Refinance mortgage is common with residential homes. It is ideal especially if you want to secure a low interest rate as well as pay less loan amount. If you have a home mortgage and good credit score, consider refinancing. The interest rates are currently low and it may pay to refinance.
When To Refinance
Before you consider refinancing, the following conditions must prevail. Mortgage interest rate must be falling. In this way, you will be lowering the overall cost of borrowing the second loan. Secondly, home values must be increasing. If your mortgage-to-value ratio is low, you may secure your second loan due to increased equity in your home. You can then use the equity to pay off credit card debt, big purchases and other types of loans. On the other hand, you must have been in your home for the early years of your mortgage. This is because early on, the payments cover interests only. As you begin repaying the principal, refinancing is recommended.
Reasons for Refinancing
Borrowers normally resort to refinance their home due to several reasons. For one, refinance mortgage allows borrowers to switch from variable interest to fixed interest rate. Secondly, it helps take advantage of low interest rates which translates to reduced monthly installments and shorter amortization schedule. Individuals with financial distress should consider refinancing in order to consolidate other debts, reduce the monthly repayment amount as well as free up cash. In personal finance, refinancing is considered a better option of managing debts.
Types of Loans Used to Refinance Your Home
There are two types of loans used to refinance home mortgage. They are categorized as either fixed rate mortgage or adjustable rate mortgage. As for the fixed rate mortgage, you pay a constant amount of interest for the entire period of the loan. On the other hand, an adjustable mortgage interest attracts lower interest for the first 5 years after which the interest will change according to the market conditions. This means that you may either pay high or low interest but it is a riskier option compared to the fixed rate mortgage considering the unpredictable market conditions.
Mortgage Refinance Costs
Refinance mortgage expenses varies from one person to another. It depends on credit score, lender, loan amount and interest rates. Be ready to pay these refinance fees when considering a second mortgage. They include: escrow and title fees, lending fees, points, appraisal fees and credit as well as insurance and taxes. These are basically closing costs of a mortgage refinance. Points are used to buy down the interest rate over the entire loan amortization schedule. Be sure to consult with a financial adviser if you do not understand one or more of these costs
How to Shop Around For Refinance Mortgage
When shopping around for the best refinance deal, negotiate with your current lender. Although you may choose another financier, the cost of doing so is much higher. Refinancing with your current lender is better especially if your mortgage is still a few years old. This is because all the fees involved may be removed because the initial paperwork may still be active. Compare different lenders while reviewing their lending terms both in costs and interest rates. This is much easier if you use online platforms like websites and mortgage calculators. Before signing any paperwork, read and understand its contents.