Now that the economy is on the path to recovery, many homeowners want to refinance, but is mortgage refinancing right for you? This is the question that every property owner needs to ask themselves before submitting an application for refinance. To answer this question, the objectives of refinancing must be considered.
Reasons for Refinancing a Mortgage
One of the main reasons for refinancing is to lower monthly payments. This is usually done by extending the term of the mortgage to distribute the outstanding balance over a longer period of time. This will result in lower monthly payments that may be conducive to the borrower. Another reason for refinancing is to lower the interest rate. Property owners who procured a mortgage when interest rates were high can refinance their mortgage to take advantage of the low interest rates currently being offered by lenders. Lowering the interest rate reduces the outstanding balance of the mortgage as well as the monthly payments. The third reason for refinancing is to fix or lock the mortgage rate. Individuals who have an adjustable rate mortgage usually pay a fluctuating interest rate on their loan. This is because rates are determined by the market. Sometimes rates can drop to an all-time-low and at times, it can increase to a record high. This can be disadvantageous to any borrower, so refinancing gives them the opportunity to lock the mortgage rate at the prevailing market rate. There are some people who usually refinance to reinvest. After paying off their mortgage, the property owner may seek refinancing to buy another property for cash and rent it out to tenants for a regular monthly income. The money can also be put to a wide range of other uses like bailing someone out of jail or paying for a costly medical procedure. Whatever the reason for refinancing, it is important for property owners to assess their financial situation objectively to determine whether or not mortgage refinancing is right for them.
Property owners may consider refinancing if they:
– Are paying a higher mortgage rate: If the prevailing interest rate is much lower than what a property owner is currently paying, refinancing makes a lot of sense. Getting a reduction of a single percentage point can translate to thousands of dollars in savings over a period of several years.
– Have an adjustable rate mortgage: A fluctuating mortgage rate is like a loophole for lenders to increase monthly payments whenever they see fit. For more stability, borrowers should ask for a fixed rate mortgage when refinancing, especially when rates are very low. This will translate to a fixed monthly installment throughout the mortgage term.
– Cannot afford the monthly payments: Financial situations usually change from time to time. If making the required monthly mortgage payments becomes challenging due to one reason or another, refinancing may be very helpful. It can reduce monthly payments by extending the term of the mortgage.
– Need a significant amount of money urgently: There are some dire financial situations that can only be resolved through refinancing. For instance, if a spouse or child is charged with a crime, refinancing may be done to bail them out. If a family member needs to undergo a costly medical procedure that is not covered by insurance, mortgage refinancing may also be a good idea.
That said, mortgage refinancing only makes sense if the new interest rate is considerably lower than what the property owner has been paying. Also, the new rate should be locked or fixed. The terms offered by the current lender should be compared to what other financial institutions are offering.