Mortgage refinancing is a widely used term to describe the process of securing a new mortgage to replace your old one. Borrowers most commonly refinance when their financial circumstances change so that renegotiating the terms of their original mortgage might prove to be beneficial.
Reasons for Mortgage Refinancing
- Borrowers most commonly refinance their mortgage when interest rates have changed in their favor. This can be the result of a change in the housing market, or the applicant’s improvement upon their credit score. Interest rates and refinancing are closely intertwined as even fractions of a percentage point can save homeowners thousands over the lifetime of the loan.
- Refinancing can also be effective for adjusting the length of the mortgage. This option can help lower your monthly payment by extending the length of the loan, or shorten the term so as to reduce total interest costs.
- Changing the type of mortgage can be advantageous. Some borrowers prefer a fixed rate mortgage which locks in a consistent interest rate and monthly payment. Others prefer an Adjustable rate mortgage which changes depending on the interest rates. Mortgage refinancing allows the applicant to renegotiate towards whichever option best fits their current circumstances.
- ”Cashing out” on the equity of your home. Refinancing the mortgage for an amount greater than the amount owed on the home can provide borrowers with a cash payment. The amount received is dependent on the amount of equity the property carries (the value of the property versus the mortgage balance), but can be helpful for home improvement or a child’s education.
Mortgage refinancing can be an excellent option for lowering monthly payments and debt consolidation, however it is important to make sure that ultimately the cost is worth the benefit. Be sure to take into account factors such as closing fees, the amount of time you’ve been paying your current mortgage, and how long you plan to live in your home, as they play a crucial role in whether refinancing is the right decision.