A mortgage is generally the largest debt most homeowners have to manage. For many homeowners, once you have set up your mortgage, it’s generally out of sight and out of mind: the payments come out of the bank account, and the rate and term you or your mortgage broker worked to secure you is all but forgotten. It’s not until your mortgage is up for renewal that you question whether you’re getting the best deal. But you don’t need to wait until your next renewal.
Refinancing a mortgage means paying off an existing loan and replacing it with a new one. Refinancing can lead to substantial savings and more financial breathing room – sometimes even with the penalties that lenders charge when you make changes before your renewal. Just like applying for a new loan, you need to have all your documents in order. This includes your mortgage statement, the last property tax assessment from your respective city, your job letter, pay statement and possibly your Tax returns from the past two years. Keep in mind that, like taking out the original mortgage, refinancing requires appraisal, title search and application fees, so it’s important for a homeowner to determine whether his or her reason for refinancing offers a true benefit.
The four most common reasons why homeowners refinance are:
1. Securing a lower interest rate
Interest rate and loan amount determines the total cost that a borrower will pay. The lower the interest rate, the less the overall cost will be. Interest is calculated on a daily basis and usually paid back to the lender on a monthly basis. Make sure your credit is in good shape: The better your credit, the better rate you can expect.
2. Lower Payments
Lowering a mortgage payment can be achieved by lowering the mortgage rate, lengthening the loan term, combining two or more loans or removing mortgage insurance. But don’t let a great rate distract you and lock you in for years longer than you initially planned. Depending on your personal situation, refinancing could mean a little bit more financial freedom in the future, and a little less day-to-day stress over your finances.
3. Converting Between Adjustable-Rate and Fixed-Rate Mortgages
While Adjustable Rate Mortgages often start out offering lower rates than fixed-rate mortgages, periodic adjustments can result in rate increases that are higher than the rate available through a fixed-rate mortgage, which also eliminates concern over future rate hikes. Conversely, converting from a fixed-rate loan to an adjustable-rate mortgage can be beneficial in a falling-interest-rate environment.
4. Debt Consolidation
Consolidating high interest debt — like credit card balances and/or loans — into a low interest mortgage with a lower monthly payment can significantly reduce the short-term deficits in a budget and save you thousands in interest payments. While this argument may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision. Be aware that a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. Take this step only if you are convinced you’ll be able to resist the temptation to spend once the refinancing gets you out from under debt.
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. When used carefully, it can also be a valuable tool in getting debt under control. Before you refinance, take a careful look at your financial situation. You may choose any company to refinance your mortgage since the new loan will replace the existing mortgage. Your current mortgage company may require less documentation, but this could add additional cost or a higher interest rate. Overall your best bet is to think long term and talk to a mortgage professional about your options. Your real estate agent can give you a few recommendations on mortgage professionals you can trust.