In case you own a property, you’re probably familiar with some basic principles of the mortgages. Anyway, I hope this article will help you understand how to gain additional benefits if you decide to refinance your mortgage.
What is a mortgage, and why should you refinance it?
A mortgage is typically considered as ‘good debt’ because it represents an investment into something that has a lasting value or would possibly provide the appreciation. What’s more, home equity loans for example usually have lower rates than credit cards or some other type of loan. As you have to make monthly mortgage payments, a part of each payment applies to the interest of your loan, and the other part becomes the equity in your home.
Your mortgage may be your biggest debt, which is why it is crucial to evaluate this obligation to determine if refinancing would give you financial benefits. If you don’t capitalize on refinancing opportunities, you can be missing out on big savings. Refinancing can allow you to:
- Reduce the monthly mortgage payment
- Change loan terms from longer to shorter, or vice versa
- Change from a fixed rate to an adjustable-rate mortgage
- Change your adjustable-rate mortgage to get new terms for the interest rate adjustments
- Take cash out from equity
Keep in mind that a mortgage refinance might have closing costs and fees, usually 3% to 6% of the loan amount. Compare your loan amount, the interest rate, and the length of your current loan with new refinancing terms with a mortgage refinance calculator to determine your possible monthly savings. I suggest you check that your current mortgage doesn’t have prepayment penalties that can impact these savings.
Benefits of Refinancing Your Mortgage
Firstly, if you’re refinancing to take advantage of the lower interest rates, then you’ll see your monthly mortgage amount going down which would provide you with more money on the ongoing bases for some other things, so you can end up paying less on interest over the life of your loan.
If you refinance with a home equity loan or cash-out refinance, then refinancing your property allows you to make the use of additional funds because you paid equity into your property, and you’re using your home as collateral.
Mortgages are typically up to 100% tax-deductible. The interest you’ll pay for this loan will reduce a tax burden. You should consult with a tax advisor to learn more about your situation.
Some of The Tips For Refinancing
Refinancing your mortgage is pretty much similar to the applying for the initial home loan. You need to get your finances in order and make sure that your credit report reflects your current financial situation accurately. You’ll have to provide your personal, financial, and employment information as well as the information about your home. A refinance checklist is what can help you collect the information in advance so that your application process goes smoothly.
You can use cash-out refinance or a home equity loan for any purpose. Anyway, since that is a secured debt with your home as collateral, you would want to avoid using cash for short-term expenses. Think about using these options for a significant life event that offers a lasting value such as debt consolidation, home improvement, or major expenses.
In case you would like to refinance to take advantage of lower interest rates, then you should consider an interest rate lock as a part of your application process. That guarantees you’ll have access to the current rate at the time of the settlement, which might take up to 30 to 60 days.
I suggest you shop among lenders and compare all terms of the offer besides just the interest rate since this may be your second largest debt decision. Research all of the options in order to make the best possible decision for you.