Actually, note that refinancing your mortgage is simply an option if you are looking to save money or increase cash flow. And you might want to lower the interest rate on your mortgage to reduce your monthly payments or you might want to refinance your home to pull out equity for liquid cash.
And then basically, this particular refinancing is actually applying for a new mortgage to pay off the old mortgage. There are many factors to consider when deciding if refinancing is right for you.
On this one, rest assured that we have carefully put together how to understand if you should refinance and how to do it.
The Basic types of Refinancing
Actually the different types of refinancing options fall under two categories, which increasing liquid cash or lowering monthly payments.
The Refinancing to Get Cash
- You can apply for refinancing to pull equity out of your home in cash. This is often the best option if you are looking to renovate your home.
The Refinancing to Lower Mortgage Payments
You can apply for refinancing to:
- Reduce the length of your loan so you pay less interest
- Shorten the interest rate on your mortgage either because interest rates have dropped or because your credit score and income have improved since your original mortgage
- And move your loan from a variable rate mortgage to a fixed-rate mortgage to lock in a lower interest rate and not have to worry about your interest rates increasing
- Also remove the need for mortgage insurance once you’ve built up enough equity in your home. Once you own more than 20% of the value of your home you no longer need to pay Private Mortgage Insurance
The Top benefits of Refinancing
Yes, refinancing is usually a means to save money you would normally be spending on your mortgage to save, invest, or spend elsewhere.
Increase Cash Flow
Pulling equity out of your home can give you access to cash you otherwise would not have. You can use this cash to repair your home, make a major purchase like another property or vehicle, pay for education, etc. If you use the cash to repair your home you can also deduct the interest from your taxes.
Refinancing your home and pulling out equity can create new opportunities for homeowners to make investments or improvements to their life.
More Money Every Month
Refinancing your home to get a lower interest rate can free up a portion of your monthly income that would normally go towards paying interest on your mortgage. Let’s say you can lower your interest rate by 0.5%. Whatever the difference is between your original monthly payment and your new monthly payment, is now extra money you can spend or save.
To Pay Off Your Home Loan Sooner
With this, refinancing your home can also shorten the length of your loan which would allow you to pay down your debt and build up equity faster. There are many reasons you might want to pay off your home sooner. Perhaps you want to purchase a rental property or just reduce your overall debt.
What exactly to Look Out For
Refinancing your home is creating a new home loan. You are technically paying off the old loan with the new home loan. There are costs associated with applying and there can be extra fees depending on how you pay down your loan.
Basic things to Consider
- First of all make sure the amount of money you save by refinancing is more than the fees and potential penalties
- The shop around for different interest rates to find the most competitive option
- Also you might find your original lender is the easiest and most cost-effective option. It often is. However, keep your options open for something more competitive
- Then considering hiring a professional or a lawyer to help you understand your new loan
- Make sure interest rates are lower if you do refinance
- And work on improving your credit score and other factors the bank might consider, like income and debt, to get a more competitive interest rate
While the market is not something you can control, your credit score is. The better your credit score, the lower your interest rate will be. Having a high credit score also gives you more options. It will be easier to get approved with different lenders and for different types of refinancing if you have a good or excellent credit score.