When to Refinance a Mortgage
Paying off the current home loan and replacing it with a new loan is considered refinancing a mortgage. There are many reasons why people refinance their mortgage, from shortening the term to obtaining a lower interest rate. You can also convert your mortgage from an adjustable-rate to a fixed-rate. Refinancing does not mean that you will end up with more than one mortgage, it simply replaces your first loan with a second one by paying off the first loan. Refinancing your mortgage is the best move for your money. But, refinancing requires some paperwork. Before getting your mortgage refinanced, make sure to have a checklist of the following:
- You must have maintained and paid the original mortgage for at least a year.
- You must have a proper income. When refinancing, the lenders will make sure that you can pay off your debts.
- Your credit score must be decent enough. A good credit score will reflect in your interest rate.
Hence, you can and you must refinance a mortgage. When is the right time to refinance? Well, refinancing can be smooth when you can count yourself in any of the following:
From ARM to FRM
Adjustable-Rate Mortgage or ARM is where your interest starts at lower rates. Gradually, these rates will increase and cost you a lot of money. Hence changing your mortgage from Adjustable Rate to Fixed Rate is better. A Fixed Rate mortgage means a lower interest rate even in the future. Unlike Adjustable Rate, this scheme sticks with the same low-interest rate.
Shorten the Term
Refinancing can actually shorten your loan term. Refinancing your interest rate from 8% to 4.5% can bring your term to an exact half. Let us say you have 20 years to repay your loan, refinancing your mortgage smartly might reduce it to 10 years only. Though this would increase the amount, it will reduce the term.
Cash-Out Refinance Mortgage
Cash-out refinance means replacing your current mortgage with a new one. The only difference is that the new mortgage is higher than the previous one. How is cash-out refinancing beneficial? The extra amount you pay in the new mortgage comes to you in cash and you can spend this on improvements and renovations. But, you need to have equity in order to use cash-out refinance. The pros of having a cash-out refinance are as following:
- Higher Credit Score.
- Consolidation in Debt.
- Deduction in Tax.
- Low-Interest Rates.
Therefore, refinancing your mortgage can be a good step. Keep in mind the above-mentioned points before refinancing. On the other hand, refinancing helps you in the future, too. It makes your future financially secure. Smart investments and judicial use of refinancing a mortgage will provide you a better future. But while refinancing you must be aware of the interest rate and the global economic situations. These offers are risky when you don’t pay attention to details. So be smart, aware, and cautious when refinancing.
