When you refinance your mortgage, you will be borrowing based on your home’s net worth. Essentially, you will be looking at the differnece between the present value of your property and the remaining balance on your home’s mortgage.
When you refinance your property, you may be able to borrow up to 80% of its appraised value. You can then use the new credit source in order to fund many different personal projects. Here, we will focus on how mortgage refinancing can benefit your home.
How Refinancing Your Mortgage Works
First, you will need to take out a new mortgage in order to pay for your first mortgage. The terms and interest rate for your second loan will be different than the first. The lender may also be a completely different lender for your new mortgage loan.
The repayment clock may also be reset. If you have already made five years of payments on your first 30-year mortgage, then it will mean that you have 25 years left on it. However, if you opt to refinance to a new 30-year loan, then you will need to start anew. Or, you can opt to take on a new 20-year loan instead, which will mean that you’ll be able to repay your mortgage five years earlier than your first loan.
Refinancing your mortgage may affect your credit, but the impact is usually minimal. Mortgage refinancing benefits can help you fund other projects that you have placed on the backburner.
Tips for Choosing the Right Mortgage
Try to put a little more money aside in order to pay your first mortgage before you apply for refinancing. By paying down more, the amount that you owe on your property will go down.
Try and improve your credit score. A higher score will usually mean that your interest rate will be lower. As well, check your credit score for mistakes. Any inaccuracies should be reported immediately, as they can be corrected in order to boost your credit score. It is also important to shop around in order to find the optimal interest rate. Different lenders will require different refinancing fees, so compare and contrast fees before selecting your lender.
Home renovations can increase the real estate value of your home, which may help you qualify for refinancing and help you get a better rate. You should also take the time to learn about the differences between payment rates. Speak to an advisor if you have any doubts or questions.
Factors to Consider Before Refinancing Your Mortgage
You need to evaluate your current equity. Your home’s equity will depend on how much your home has appreciated, as well as how much of your mortgage you have already paid off.
You need to factor your debt-to-income ratio (DTI). Your DTI is the percentage of your monthly income (gross) that you put aside in order to make your monthly mortgage payments.
Work on improving your credit score. Pay off your debts as soon as you can, and without missing any payments, in order to boost your credit score.
The cost of refinancing will also need to be considered. Closing costs, home appraisal costs, and mortgage-breaking penalties are just some of the possible fees of refinancing.
Also, assess what your current interest rate is. One of the reasons why some people decide to refinance their homes is due to lower interest rates. Even a 1% drop can save you hundreds of dollars each month.
The Many Benefits of Home Refinancing
If rates have gone down since you received your loan, then you may want to consider refinancing. Reduced interest rates will translate to lower payments each month.
If you have high-interest credit card debts that are draining your finances, then you may want to consolidate your debt. The extra cash that is freed up from refinancing your property can be used to pay off other debts.
Your credit score will also improve. The more on-time monthly payments you make, the more your credit score will go up. A higher credit score will help during the negotiation process, as you will be more likely to refinance your home with a lower monthly interest rate. As well, if you refinance to a home mortgage that has a lower term, then you will have the opportunity to pay off your debts faster.
While your monthly payments will be higher by going from, say, a 30-year term to a 15-year term, you will be charged lower monthly interest rates as a result. If your financial situation has improved recently, then refinancing will allow you to become a homeowner quicker. You will also save money that would have gone towards private mortgage insurance. Private mortgage insurance may be a requirement if you want to take on a conventional loan.
Interesting related article: “What is Mortgage Protection Insurance?”