It is very rare that a homeowner will hold their original mortgage for the entire term of the loan since refinancing has become so popular. Refinancing is a common mortgage transaction that homeowners choose to do after several years of owning a home. In short, a refinance is the process of taking on a new mortgage that replaces the original mortgage. Today’s easy access to competitive mortgages has made this possible. Since many homeowners remain undecided about taking on a new mortgage, there are 5 ways to tell if you should refinance.
1. Lower mortgage rates available
Mortgage rates are not set in stone and will vary from day today. In fact, mortgage rates are so vulnerable to market conditions, they can actually change from minute to minute or several times per day. For this reason, lenders have what is referred to as rate sheets which are continuously updated throughout the day. When mortgage rates being offered are lower than the rate of the homeowner’s existing mortgage, the homeowner should consider refinancing. Since the mortgage rate determines the amount of interest that is paid on the loan, refinancing to a lower rate will mean that the borrower will be paying back less interest to the lender. However, refinancing just for a lower mortgage rate is best done during the early years of the mortgage.
2. Lower rates and shorter-term possible
At times when mortgage rates have fallen, it is often a good opportunity for homeowners to refinance to a shorter term loan. However, while a shorter term loan will offer a lower mortgage rate than a longer-term loan, the resulting monthly mortgage payment may be the same as the original mortgage payment or slightly lower or higher due to the amortization of the loan. If a borrower is comfortable with the mortgage payment on a shorter term loan, refinancing will dramatically reduce the overall interest paid on the mortgage over the life of the loan.
3. Refinancing out of an adjustable rate mortgage when fixed rates are low
Many homeowners will opt for an adjustable rate mortgage when the rate is significantly lower than the fixed mortgage rate being offered. However, when rates fall, it is an opportune time to take advantage of refinancing to a fixed rate mortgage. While adjustable rate loans may have initially low rates, they remain a risky choice because the borrower does not know what the rate will change to at the adjustment period. Refinancing to a fixed rate mortgage will provide the borrower with the security of knowing that the rate cannot change and will remain consistent for the entire term.
4. Difficulty Making Monthly Mortgage
Payment It is not unusual for things to happen that will make it difficult to make the monthly mortgage payment. Whether it is a one-time hardship or several, or just life changes that occur, refinancing can be a way to reduce the stress of struggling to make the monthly payment. With so many mortgage programs available to homeowners, inquiring about the different options that are available and more accommodating to the homeowner could have positive benefits.
5. Too many monthly debts
Almost everyone has done it at some point – run up credit cards bills or other debt. When this happens, it is often possible to consolidate this debt by refinancing. In order to be able to do this, there must be equity in the property which is taken and used to pay off the other debt. This is referred to as a debt consolidation refinance or cash out refinance. When this type of refinance is taken, the outstanding debt is paid off. Now that the outstanding debt is part of the mortgage balance, there is only one monthly payment, the mortgage payment. Since credit card and short term debt usually carries a higher interest, the result of a debt consolidation refinance will normally be a lower monthly mortgage payment. This will free up extra cash for the homeowner on a monthly basis.
While these are the common ways to know that it is time to refinance, there are many other reasons that homeowners may need to move to a better mortgage, each one just as important. Refinancing is always a personal decision that must be taken seriously since it does cost the homeowner money. However, in most cases, if you should refinance and the timing is right, there will be a lot of savings involved that will make it the best decision.