Should You Refinance Your Mortgage?

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While having a mortgage allows you to build equity, the long repayment term can be draining. When the opportunity arises, many borrowers reconsider refinancing their mortgage loans.

Refinancing sometimes comes with better loan terms, especially if you’ve serviced your mortgage loan for several years. However, refinancing doesn’t always work in one’s favor.

Here are a few tips that will help you decide when you should refinance your mortgage;

Getting a Lower Interest Rate

If the market rates have gone lower, you can consider refinancing your mortgage. With this, you get new repayment terms with a lower interest rate, which lowers your monthly repayments.

However, the new market rates need to be much lower, at least 2-percent lower or more, to make any significant difference. But some lenders go for a 1% decrease, which is enough when there is a substantial difference in their mortgage payments.

A Shorter Repayment Period

A long-term loan, even a mortgage, results in high-interest amount repayments. You can refinance your mortgage to get a shorter term, which can lead to saving some money. For example, if you have 20 years left to repay your mortgage and have a chance to lower that to at least ten years, the new term will save you ten years of interest repayment.

Tapping Into Your Home’s Equity

Has your home increased in value since you bought it? Usually, a home is a form of equity investment, even if it’s still on the mortgage. Once you repay off the mortgage, the house is all yours.

That means you can leverage the increased equity for a quick cash out. If you need funds, like paying off high credit card debts or have a major purchase, you can refinance your mortgage for a cash-out. It’s a great choice for anyone in need of cash.

What To Know Before Refinancing

Refinancing a mortgage may sound like the greatest idea, especially when you are cashing out for extra money. However, here’s what you need to know before refinancing your mortgage;

The cost

Refinancing could be costly, with costs ranging from 3%-6% of the total loan you get. These costs cater to services like title search, application fee, attorney’s fee, among others. In case the lender offers no such costs, the interest rate offered could be higher for the lender to cover its closing costs. One can negotiate some of these costs depending on the lender; you just need to talk to your lender.

The equity of your home

Most lenders prefer to refinance on a home with higher equity. If the market is struggling and real estate in your area declines, it could affect the value of your home.

Your credit score

Your lender will confirm whether you have a good credit standing, which can determine your new loan terms. An excellent credit score will earn you better terms, like repayment period and interest rate compared to a bad credit score. If your lender flags your credit as a bad loaner, you might end up with a higher interest rate than the one you already have.

Debt to income ratio

You can do this by stress testing your finances. Lenders consider more than your credit score and need to know if you have a healthy debt to income ratio. Most lenders want to go for a less than 36% ratio, but others can go up to 43%. You might have a high-income level, but if the lenders find out that you have high debts that lower your debt to income ratio, the probability of refinancing could be lower. If you have high debts, try to clear those debts first before refinancing.

The term

While lenders only focus on getting a lower interest, they often forget to consider the term of the loan. If you want to finish your loan fast, consider a short repayment term with installments you can afford. But if you plan to pay the lowest installments, ensure you get a longer-term but with a lower interest than your current rate.