Mortgage refinancing is a term that gets thrown around quite a bit in the real estate industry. For those who aren’t familiar with the term, mortgage refinancing refers to paying off the existing housing loan by obtaining a new one and then paying the new one in place of the mortgage. There are various reasons why a homeowner would choose mortgage refinancing. Some people opt for it to get a better interest rate while others may do it as an attempt to reduce their monthly payments. There are also those who opt for mortgage refinancing to draw out built-up equity, to change the type of mortgage or to adjust the length of the mortgage. Regardless of the motivation, mortgage refinancing provides homeowners with a range of financial benefits.
Understanding the Refinancing Process
The timing is crucial to make sure that you do get the financial benefits that you are looking for. There are many situations when mortgage refinancing can be a bad decision to your financial health. For starters, it is not a good idea to refinance when you have had your mortgage for a long time. If you choose to refinance late in your mortgage, you will be restarting the amortization process and the majority of your monthly payments will be credited to making interest payments, as opposed to building equity. If your current mortgage has been issued with a prepayment penalty, refinancing is not a very good idea. A prepayment penalty is a fee that is imposed on homeowners to discourage them from paying off their loans early and this penalty charge applies for refinancing as well. If you are employing the same lender for refinancing, be sure to check if there is a possibility of waiving the prepayment penalty. Additionally, if you have plans to move to a new home within a few years, it is best to not go for refinancing. The main purpose is to enjoy a financial benefit such as saved money or a reduction in the mortgage length – by picking the wrong time you just might end up losing money.
Do you qualify for refinancing?
Ensuring your eligibility to refinance is an important part of the process. The process is similar to what you experienced with your first mortgage – where your income, credit score, existing debts and assets were assessed by your lender. Factors such as the amount that you wish to borrow and the current property value will also be taken into consideration. If your credit score is lower than what it was when you obtained your current mortgage, you will be required to pay a higher interest rate for the new loan. The value of your home will be determined by an appraisal and lenders will only issue an approval if the loan-to-value (LTV) ratio falls within their lending guidelines. In some cases, if the LTV does not fit lending guidelines, they may offer you a loan with terms that aren’t as favorable as you would like. In the case of reduced housing prices, your home might not be valued at the same price as what you owe on your original mortgage.
Despite the benefits, mortgage refinancing needs to be addressed with care to avoid getting into financial trouble. Be sure to consult a quality advisor before you proceed, as the wrong choices can lead you to greater debt.