(Newswire.net — June 16, 2021) — With ultra-low interest rates and changing circumstances, you may be considering renegotiating your existing mortgage.
There are plenty of reasons people decide to refinance, but there are some things you should consider before going through with it.
What are the types of refinancing, and when would you do them?
There are two types of refinancing that are most common, which are Cash-Out Refinancing and Rate-and-Term Refinancing.
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Cash-Out Refinancing is when you refinance your mortgage for a more significant amount and take the difference in cash. With current low-interest rates, this kind of refinancing can be beneficial and a better option than a personal loan. Using it for paying off debts, renovating your home, or something else you need to pay for can end up costing you less over time.
- Rate-and-Term Refinancing is when your mortgage rate and term are negotiated and changed. Suppose you’re looking to lower your monthly payment. In that case, you can refinance your mortgage for a longer-term, your principal balance doesn’t change, but your payments are lowered.
There are plenty of other options that your financial institution may offer, so ensure you’re speaking with your bank and weighing out the pros and cons of each.
Every option will have benefits and drawbacks; it will depend on your situation which will work best for you.
How do you know when you qualify for refinancing?
Qualification requirements for refinancing will vary among lenders, but some common standards apply in most cases.
You’ll typically need a great credit score to qualify for refinancing. Your credit is an essential part of assessing the risk lenders take when loaning you money. You can speak to your lender about what the minimum requirements are for refinancing.
Another common requirement is a low debt-to-income ratio (DTI). You’re a higher risk to financial institutions when you have a lot of debt compared to your income.
The higher your DTI ratio, the more likely you are to default on your payments. Your lender will be able to discuss the percentages with you and let you know the likelihood of you being approved.
The third most common requirement is equity in your home. The cash-out refinancing banks entirely on the value of your home and its equity for approval. Most lenders will require that you have some equity in your home before they consider you for refinancing. More info on this here.
Consider your goals
Ultra-low interest rates are not a good enough reason on their own to refinance your mortgage. If you are looking to reduce your mortgage payments, refinancing could be the best option for you. Specific refinancing options can reduce your monthly payments and save you significant amounts of money off your loan interest.
Suppose you want to put some money into your home by doing renovations, or you need to replace some expensive appliances. In that case, refinancing could be an excellent option for you.
With renovations, you’re also adding to the value of your home, so it’s a bit of a win-win. You just need to ensure that you’re okay with your mortgage amount changing.
If you have an adjustable-rate mortgage, now is a great time to refinance and lock into lower rates because there’s no guarantee that they won’t go up very soon.
Is refinancing worth it for you?
Depending on your situation, refinancing may not be the most financially sound decision. If you’re opting to pull out the equity, you will have closing costs on top of the extra money on your mortgage.
Your closing costs can be between 2-5% of the loan, so if the amount is $3,000 and you end up saving $100 per month on your mortgage, it will take almost three years to break even.
Your lender will have different closing costs and different policies, so it’s best to discuss all of the details with them beforehand. You may be given the option to roll the closing costs into the loan, making it worth it for you in the present.
Some institutions will have no-cost refinancing (beware) but have higher interest rates, so in the end, you’re paying the same amount, if not more. It’s important to discuss all the fees associated with refinancing before you opt-in. You need to ensure you can afford it, know exactly what you’re paying for, and whether or not it’s worth it for you.
It is ideal for your financial health to pay the closing costs upfront, but if you’re refinancing because you need the money, that might not be the best for you.
How does my mortgage payment change?
Your mortgage payment amount will change depending on the type of refinancing you choose. If you decide to refinance with a lower interest rate and keep the same term, your payment will go down.
Suppose you decide to refinance with a lower interest rate and choose a longer-term. In that case, your mortgage should go down significantly.
Choosing to refinance with a lower interest rate on a shorter-term will make your payments go up. Still, you’ll save money in the long run on interest and own your home much quicker than you otherwise would.
If you opt for cash-out refinancing, your payments typically increase each month. If you take enough equity out of your home, you may also need to pay for Private Mortgage Insurance (PMI). PMI comes into play when you refinance, and your home has less than 20% equity leftover.
The insurance is a safety net for your lender if you happen to default. Not all lenders will require this, so you will want to discuss it with yours.
Determining if your monthly payment will go up or down is crucial before deciding to refinance your mortgage.
What are the downsides of refinancing?
With every big financial decision, there are both pros and cons. Much of it will depend on your situation, your goals, and if the pros outweigh the cons.
With cash-out refinancing, it could be entirely worth it or just add extra money to your mortgage payment and result in extra insurance payments. If you’re remodeling your home, you’re increasing the value of your asset.
If you’re paying off debt, refinancing could be the best option given the interest rates. When using equity to pay for your debt requires some due diligence that you don’t rack up debt again to make refinancing worth it.
Suppose credit card debt is burdensome for you to navigate. In that case, you may want to reconsider because you could end up with extra money on your mortgage payments and the same amount of debt, leaving you worse off than when you started. It could even potentially result in you losing your home.
Refinancing for longer terms almost always results in more interest, where your mortgage could go from a typical 30-year term to 45 years. The clock on interest restarts from the time of the refinancing, so you may end up paying down interest for years before making a dent in your principal.
Consult your financial institution
Overall, you know your financial situation better than anyone. Knowing which questions to ask your lender is best when approaching refinancing your mortgage. Be aware that as long as you meet the requirements, they will likely try to sell you a new loan to give them more profit on interest.
Being armed with the knowledge of the different refinancing options and being savvy with your questions should allow you to make the best decision for your financial health. Refinancing your mortgage can be a fantastic tool, depending on what you’re looking to achieve.
Check out even more reading at these suggested links:
https://www.cnn.com/2021/02/22/cnn-underscored/how-to-refinance-mortgage/index.html
https://finance.yahoo.com/news/4-things-know-refinancing-record-160000204.html