Home Mortgage Refinancing Basics
Mortgage refinancing is when you pay off an existing mortgage with a new one. The new home loan should have better terms or features that improves your financial situation. People typically refinance their mortgage to lower their interest rate and monthly payments. Let’s take a look at some common reasons to refinance and questions you should ask before you embark on your home refinancing journey.
Common Reasons to Refinance Your Mortgage
Why refinance your home loan? Consider these reasons:
- Lower your interest rate
Many people refinance to low their interest rate. When you refinance, you are signing up for a new loan with a new loan term.
- Lower your monthly payment
By refinancing to a lower interest rate your monthly payment may be lower.
- Shorten the length of your mortgage
Refinancing to a shorter term length will allow you to pay off your loan faster and pay less total interest, but you’ll be making a higher monthly payment.
- Switch from Adjustable Rate Mortgage to Fixed Rate Mortgage
People will switch from an adjustable rate mortgage to a fixed rate mortgage when they believe that interest rates will rise in the future.
Questions to Ask Before Refinancing Your Mortgage
Ask yourself these questions to determine if you should refinance:
- Does your mortgage have a prepayment penalty? Check your monthly mortgage statement to see if your mortgage has a prepayment penalty. If there is a prepayment penalty, you’ll have to pay the penalty to refinance your mortgage. You may be able to avoid the prepayment penalty if you refinance with the lender you have now.
- Are you planning to move in the next few years? If you know you’re going to move in the next few years, you might not have time to recoup the costs of refinancing.
- Can you afford the closing costs? Refinancing typically requires closing costs which could be in the thousands. Lenders may offer no-cost refinancing but they are usually at the expense of a higher interest rate. Make sure you compare the advantages and disadvantages.
- How much lower will the new interest rate be? Refinancing may not be worth it if your interest rate and monthly payment savings are minimal.
- What is your credit score? If your credit score isn’t up to snuff, you may not be able to refinancing into a better rate. Check your credit score and make any improvements you can.
- Are you refinancing to an adjustable rate mortgage? If you are refinancing to an adjustable rate mortgage consider what the impacts of a future rate hike may do to your monthly payment. If interest rates are low now the adjustable rate may seem attractive. However, if rates rise in the future you may see your monthly payment increase.