If you get a new mortgage that replaces your original mortgage it is referred to as refinancing. Refinancing allows you to get a better interest rate and term. Refinancing is a great option for those who have perfect credit. It can convert a variable loan rate to a fixed rate and lower interest payments. Mortgage refinancing may not be a good idea for those who have a bad debt or poor credit.
Before considering mortgage refinancing you must do your homework. Without proper knowledge you can increase your monthly interest rate rather than lowering it. This can make paying your monthly mortgage payments difficult. Make sure to do your own research and speak with trained financial professionals if you are considering refinancing.
What Is Refinancing?
Mortgage refinancing refers to the act of getting a new mortgage with personal goals in mind. You may want to refinance your mortgage to get lower interest rates, use cash that you have in your home for another purchase, or to change the company you have your mortgage with.
Benefits
- Reducing your interest rate
- If you demonstrate that you are able to pay off all of your bills on time you will be able to increase your credit score. Once your credit score has increased you will have the ability to secure loans at lower interest rates. By reducing your interest monthly interest rate you can save a substantial amount of money every year.
- Take equity out of your home to pay off debt
- Refinancing is a great option for those who are looking to pay off credit card debt or other personal loans that have a higher interest rate than their mortgage. This can help to save a lot of money in the long run that would otherwise be spent on interest without paying down the principle of what you owed. Taking out a home equity line of credit involves a few steps including getting your home appraised and then finding out how much the lender is willing to loan based upon the appraisal.
- Take equity out of your home to purchase items
- If you are looking to make a new purchase such as a car, pool, home renovations or a cottage you may want to refinance your mortgage. This will allow you to take equity out of your home and add these purchases to the remainder of your mortgage. This can have a positive effect on the amount of interest you have to pay and your credit score.
Risks
- Possible financial penalties
- In most refinancing agreements mortgage companies are allowed to charge you a fee for paying down your existing loan with your line of home equity credit. Make sure to read all of the fine print before signing an agreement because the penalty can cost you thousands of dollars.
- Additional fees
- If you are considering refinancing your mortgage you will have to pay possible bank fees and for an attorney to oversee the agreement.
Mortgage refinancing can be a beneficial financial decision if you have properly weighed the benefits and minimized the risks.