Have you ever thought of refinancing your mortgage? Probably you’ve heard about refinancing but you’re not sure when it’s best to refinance or what’s involved in the refinancing process. So, if you want to know whether refinancing is right for you, keep reading!
Mortgage refinancing is replacing your existing loan with a new one. It is when you secure a new loan to pay off your old one. You may refinance your mortgage with the same lender or with another lender. In this process, you pay the amount of the current loan and then you are responsible for paying off your new mortgage. There are multiple reasons for refinancing and it’s important to know when it’s best to refinance.
The ultimate goal of refinancing is to save money in the long-run. So, before you think about refinancing, you should have a clear understanding of your financial situation and objectives. With that in mind, here are some major reasons to refinance your mortgage.
1. Lower Monthly Payment
The primary reason for refinancing a mortgage is to lower the interest rate. When mortgage rates fall then refinancing can lower your monthly mortgage payment. So, if your current rate is higher than the market rates offered today then you should consider refinancing. But how much lower rates justify the refinancing? You can calculate that even a reduction of one-half of a percent in rates can make a difference in the payments. However, it’s important to consider the fees associated with refinancing. So, ideally, you should consider refinancing if the present interest rate is lower than your mortgage by two percentage points.
2. To Convert an ARM to A Fixed Rate Mortgage
You may also think of refinancing if you want to convert an Adjustable Rate Mortgage (ARM) to a fixed-rate mortgage. It is a common practice because the ARM offers a lower rate in the beginning and then readjusts the rates periodically. Initially, ARMs provide lower monthly payments but if rates go higher, it can increase your payments significantly. And when this happens, a fixed-rate mortgage becomes a better choice.
3. Change the Term of Your Loan
Over time, your financial situations change. Depending on your current financial condition, you may want to increase or decrease the term of your loan. If you can’t reduce your interest rate, you can still lower your payments by refinancing. This is possible when you refinance your mortgage to a term that is longer than what’s left on the mortgage. This is not the best choice because the increasing term means you have to pay more in interest. However, it helps in lowering your monthly payment during a financial crisis. Another possibility is when you want to refinance to a shorter-term. You can also think of refinancing if your credit score has improved and now you can qualify for a lower rate.