Refinancing a mortgage is the procedure of getting a new mortgage to replace your current one. Thanks to refinancing, the borrower can obtain a better interest rate and an improved payment term. As a borrower with a flawless credit history, you can leverage the benefits offered by mortgage refinance to convert that destructive variable rate into a fixed interest rate. Moreover, you’ll be able to obtain a better interest rate.
Nevertheless, for borrowers with not such a good credit history or with way too much debt, refinancing might not be the smartest choice. Refinancing mortgage comes with both pros and cons, which we will look at below.
Why is Refinance Important
Whatever the economic climate, most homeowners struggle with payments for their home. Due to the unstable economy and high interest rates that keep growing, many homeowners find themselves unable to keep paying the monthly rates. Rather than starving or going by bus instead of traveling by car, most people choose to go with refinancing.
Refinancing a mortgage allows you to lower your payment rates and even get a better interest rate. However, note that refinancing means you’ll have to start all over again with a new loan. So if you already paid for 10 years and you have 20 years left of payment, mortgage refinance restarts your loan, so you’ll have to pay again 30 years.
What are the Benefits of Refinancing?
The biggest benefit of refinancing a loan is the reduction of interest rate. The higher your credit score, the better the deal you can negotiate with your credit company. With a flawless credit score, which is attained by paying debts in time, you gain the confidence of creditors and they will be able to give you great discounts on your rates. A lower interest rate allows you to save some money every month while keeping your good credit score.
Another huge benefit of mortgage refinance is that it allows you to obtain a quick amount of money that you can spend for big purchases like cars, vacations or tuition. Basically, you take money from the loan to pay your first mortgage, and the remaining balance is used as you seem fit. What you can practically do is boost the value of your home by buying new furniture, adding an extension, installing solar panels or purchasing patio and exterior decorations. Thus, you can increase the value of your home without having to open a new line of credit.
What About the Drawbacks?
Refinance mortgage is not the best thing to do for homeowners with poor credit score. Low credit score homeowners are penalized by their creditor if they pay down the existing mortgage. Thus, it is imperative to read your mortgage agreement to ensure you will not be penalized if you pay in advance to close your loan.
Another drawback of refinancing is that you need to spend some money on an attorney. An attorney will ensure that you will get the best deal available for you and will try to maximize your chances of getting a substantial reduction of interest rate.
Practical Steps to Refinance your Loan
If you decide refinancing is the option for you, then we advise you to take a closer look over the following steps on how refinancing work:
- Name your goal: what do you want to achieve with refinancing? Do you want to shorten your term? Do you need to decrease your interest rate by 20%? Always think of what you want to achieve
- Check your credit score: find out what your actual credit score looks like to understand if you are eligible for refinancing
- Research the actual value of your home: look online for home prices in your neighborhood. Here is a great tool for estimating your home’s worth: https://www.nerdwallet.com/mortgages/home-value
- Shop for the best rates available: at this point, you need to do a throughout investigation and compare the existing refinance rates offered by the main creditors out there.
- Understand the costs: we recommend hiring a lawyer or requesting professional advice from a credit officer. You need to find out all the fees associated with refinancing your mortgage.
- Gather all paperwork and submit your documents: do all the steps required by your creditor and gain your new refinance loan approved.