Refinancing a mortgage involves applying for a new loan to pay off the existing mortgage. Homeowners usually go ahead with refinancing to cash out a portion of their home equity, take advantage of lower market interest rates, or bring down their monthly payment and secure a longer repayment term.
However, before you get started with the process, it is good to understand how refinancing works, and compare its pros & cons.
How Does It Work?
The process of refinancing a mortgage is similar to the process you go through to mortgage in the first place. You start by shopping around, gathering options, comparing interest rates & terms offered by various lenders to see which one fits your needs best. Then you compare the final offer with your existing loan.
Why Should You Refinance Your Mortgage?
Here are some of the most common reasons homeowners choose to refinance their mortgage loans:
Secure a lower interest rate and payment: If the market rates have dropped since you took out your first mortgage or your credit score has become better, refinancing and getting a lower rate of interest may help you save money on interest.
Cash-out: You can cash out a portion of your home equity by refinancing. This cash out can be used to pay bills, finance a bigger purchase, and more.
Get a different rate type: If your original mortgage has an adjustable rate, you can refinance and get a loan that offers a fixed rate to avoid market fluctuations.
Refresh their loan term: Shortening your loan term can help qualify for a lower interest rate. This can help save money by reducing the amount of interest you have to pay throughout your loan. If you wish to potentially lower your monthly payment, you can do so by increasing the length of your loan term.
What Are the Pitfalls of Refinancing?
Increasing the length of your loan could result in you paying more interest.
Cashing out a portion of your equity can increase the loan amount for your new mortgage, leaned to a higher monthly payment.
There’s no way of knowing if you will get better terms on the new loan.
If market rates are higher since the first time you took out a mortgage, having a better credit score won’t be enough to secure a lower interest rate.