It’s everyone’s dream to own a home one day to avoid expensive monthly rent payments and troublesome property owners. However, since buying a home is a huge investment, many cannot afford a one-time full-cash payment for a property. As such, most people rely on mortgage loans to purchase their first homes.
Mortgage loans offer borrowers flexibility and a long repayment term, which is normally between 10 years to 30 years. You need to meet certain criteria to get the loan as lenders try to avoid defaulters and minimize risk. You can read about how to maximize your chances of getting a mortgage to access your chances.
As time goes by you may want to trade your old mortgage for a new one with better conditions. This is termed mortgage/home refinancing. What is mortgage refinancing and how can it help you save money? Read on for answers.
What is mortgage refinancing?
Mortgage refinancing is the process of replacing a current mortgage loan with a new one. This doesn’t necessarily have to be with your current lender as a new lender can refinance the home. You can rely on trusted local mortgage brokers with knowledge and experience in the field for a competitive rate.
The refinancing process takes the same form as applying for a new mortgage. The lender will assess your finances, ability to repay, and risk, to determine your eligibility and favorable interest rate.
That notwithstanding, the new loan may come with different terms. You will have new repayment years and a fixed rate instead of an adjustable rate. Most important, you may have a lower rate, which is one of the main reasons for refinancing.
Mortgage refinancing attracts a prepayment or closing cost. Your old lender will charge a prepayment fee for deciding to pay the loan early. As such, consider such fees and other terms before taking the decision. Also, consider how long you wish to live in your home, and your ability to adhere to new payment terms, before taking a refinancing loan.
When to refinance your home loan
As a homeowner, you should only refinance your home loan when it is beneficial to you. Only take this decision if it can help you save money by replacing a high-interest loan with a lower one. Or, change the current loan terms for a more favorable one. Refinance your loan when
- Mortgage interest drops significantly
- When you obtain a better credit score
- Change the mortgage terms and conditions
- You want to Change from an adjustable rate to a fixed rate
- You decide to shorten or increase your loan repayment period
- To obtain a lower monthly payment rate
When refinancing can save you money
When it replaces an expensive loan
Replacing an expensive loan with a cheaper one is the main reason most homeowners opt for a home refinancing loan. When mortgage market value declines, loan rates fall; hence, new mortgages will have lower rates. For example, if the APR on your current 30-year mortgage is 6.7 percent, and rates begin to decline, you can trade the old loan for a better rate. So, you can refinance your old 6.7 percent rate mortgage with a new 5.7 percent rate, to save one percent.
Also, if your credit ratings improve significantly after securing your first loan, subsequent loans will attract lower interest rates. Meaning, you can have a better deal with your improved credit rate if you decide to refinance your loan.
Currently, the Annual Percentage Rate (APR) on a 30-year mortgage is 6.7 percent, while that of a 15-year mortgage is around 5.9 percent. With this rate, most homeowners wouldn’t find it ideal to refinance their homes. However, on any good day with better rates, it’s a smart move to replace your old loan. Note: a high old rate is not the only reason borrowers refinance their loans. Here is how mortgage refinancing can help you to save money.
When it changes your loan terms
Depending on your current financial status or loan goals, mortgage refinancing can help to increase or reduce your repayment terms. So, if you are 5 years into your 20-year mortgage, you have 15 years left to offset the loan. You can instead take a new 20-year to refinance the old mortgage. This will reset the repayment terms back to 20 years instead of 15 years.
Contrary, you can settle for a 10-year refinancing loan to pay off the 15 years left on the current one. This will help you repay the loan 5 years earlier. Instead of 15 years, you will have a ten years payment term, with higher monthly payments.
Converts an Adjustable-Rate Mortgage (ARM) or Fixed-Rate Mortgage
Adjustable mortgage rates (ARM) initially offer lower ratings compared to fixed rates. With time, the periodic adjustments of the ARM will increase your rates to surpass that of fixed rates. With this, you may want to convert your adjustable rate to a fixed mortgage rate for a lower interest rate. It also reduces concerns about having future hikes.
On the other hand, you can also change from a fixed rate to an adjustable rate as a financial strategy. When mortgage rates begin to fall, homeowners with fixed mortgage rates may not benefit from it. Therefore, you can convert your fixed rate to an adjustable-rate mortgage through home refinancing. This helps you to benefit financially from falling rates and save money.
Home refinancing can be a great financial tool to help reduce your mortgage rate or improve the loan terms. It is a great way to build or increase your home equity if properly utilized. Several considerations should be made before opting to refinance your home. You can seek professional advice from any trusted local mortgage broker before making a decision.
The bottom line
Home refinancing can be a great financial tool if properly utilized and strategically used. It can help you restructure your loans, and help you to build your home equity. However, you need to be careful when making such a decision. Several considerations must be made to avoid future regrets. You can rely on your trusted local mortgage brokers for professional advice.