Homeowners often consider refinancing when interest rates decline or when they have a major expense such as home improvement costs. When considering refinancing, homeowners need to look at the interest rate of the existing mortgage, the interest rate of the new mortgage, the cost of refinancing, their current income and credit status as well as how much equity they have accumulated in their home. The following are some of the reasons why you should refinance.
Paying off an Exiting Mortgage Faster
By refinancing from a long-term mortgage to a mortgage with shorter term homeowners can build the equity in their homes more quickly. With short-term loans, a bigger percentage of the monthly payment goes to the principal. This is specially a good strategy if you are looking ahead to retirement and want to have your mortgage paid off by then.
A New Mortgage with Lower Interest Rate
By refinancing, homeowners could take advantage of lower interest rates. If you plan to stay in your home for many years, you would save a significant amount of money from lower monthly mortgage payments.
Changing the Type of Mortgage
When interest rates are high, homeowners often choose adjustable-rate mortgages which usually have lower interest rates to start. When the interest rates decline, refinancing to a fixed-rate mortgage allows homeowners to know exactly what their mortgage payment will be over the life of the loan. Conversely, a homeowner may wish to refinance from a fixed-rate to an adjustable-rate mortgage to lower mortgage payments for a short period of time.
Using the Equity in Your Home
Homeowners can tap into the equity that has built up in their homes to pay for major expenses such as education or home improvements. Cash-out refinancing rearranges your exiting mortgage for a higher overall amount using all or majority of your homes built-up equity to secure the loan. Home equity financing allows you to borrow from all or just part of your home’s equity.
The Cost of Refinancing
Refinancing is actually applying for a new mortgage, so you may have to pay many of the same fees associated with the original purchase of your home, including an application fee, title search and title insurance fees, a loan origination fee and legal service fees. Moreover, the contract for your existing mortgage may provide for a prepayment penalty. This means that if you pay off your mortgage earlier than the terms written in the contract, you may be required to pay an additional amount as a penalty, which is usually a percentage of the outstanding principal or 3 months interest. Your bank can inform you as to the exact amount of the prepayment penalty. Considering all these factors, you have to decide whether refinancing is advisable in your case.
You would be wise to consult a real estate lawyer who can guide you through the process and protect your interest at every step of the way. A real estate lawyer will examine the public record to confirm your ownership of the property and will arrange for title insurance, which insures both the lender and the owner for a specific amount for deficiencies in the title subject to any policy exclusions. Finally, a lawyer will conduct the closing and register the new mortgage on your property.