Refinancing is the process by which a homeowner replaces an existing loan with a new one. For most, it is a way to get a lower interest rate or shorten the length of the loan, but there are other reasons homeowners might be interested in refinancing their home loan.
If you are considering refinancing, here are a few reasons it might be beneficial for you:
- Lowered interest rate and shorter timeframe: As you make regular payments on a loan you build your credit. According to Mortgage Calculator, having a higher credit rating enables you to secure loans with lower rates. Getting a lower rate may end up saving your hundreds per month. Additionally, with improved interest rates, you can possibly also shorten the length of the loan and pay it off faster, The Fiscal Times noted.
- Consolidate payments: One reason homeowners refinance is to consolidate loans. For example, if you have both a first mortgage as well as a home equity loan, you can combine the two mortgages into one with a single fixed-rate, which simplifies the payment over the loan term, Bankrate recommended.
- Cash out: You can consider cash-out refinancing your mortgage if you’ve built a significant amount of equity in your home and want access to it now. According to NerdWallet, you can put the money you’ll receive from the cash-out toward items like high-interest loans, medical expenses, tuition payments or a number of other things you need help financing.
- Converting an adjustable-rate mortgage to a fixed-rate mortgage: If you plan to stay in you home for a while, then converting to a fixed-rate mortgage might be a great idea. This can be a way to lower your interest rate while avoiding the uncertainty of a long-term adjustable rate, as noted by the Home Buying Institute.
“Refinancing can be beneficial if it’s right for you.”
However, there can be considerations as well. Before rushing into a refinancing process, make sure you are in the right position to do so. Here are a few:
- Less mobility: Getting a lower rate is a great move in the long run, but some fees are often applicable. Not that these fees will not offset the reduction over time, but you will likely need to commit to your home for at least a few years to recover the money spent during the transaction, as noted by The Fiscal Times. On the other hand, if you are planning on staying in your home for a while, then this is simply something to be aware of. Also, some lenders offer no closing cost options, potentially saving you thousands, and worth looking into.
- Lack of approval: Your credit score and income matter a great deal when applying for a refinance. When you secured your original loan, you were of a certain financial standing. Now, if your situation has changed then this introduces a level of caution into the mix. According to Money Crashers, if you have lost a job, ran into trouble that brought your credit score down or just make less money than you did in the past, then it is possible you could qualify at a higher rate. Make sure you calculate the numbers before proceeding.
What is important is that you do your homework and speak with your lender about the various options and benefits of refinancing. You might find that now is not a good time for you to do so. On the other hand, you might walk away with a new approval, a lower rate and additional monthly savings. Do what is right for you when it comes to refinancing.