Is mortgage Refinancing a good Idea?
Mortgage refinancing transaction occurs when a homeowner pays off an existing mortgage loan and replaces it with a new loan. Refinancing occurs because of several reasons.
Mortgage refinancing will be a good move by a homeowner if he/she will benefit from the new loan he/she is applying for. In case there are chances of you wasting your money in seeking for a refinance or increase chances of landing into any form of risk, then it is advisable not to apply for a mortgage refinance.
Reasons for Mortgage Refinancing
To shorten the loan’s term
This is largely dependent on the market changes in lending industry. Homeowners will opt to refinance an existing mortgage loan for another. They however should be cautious to choose a refinance that does not have a significant effect on the monthly payment of the loan and one that has a significant shorter term as well.
Converting between adjustable rate and fixed rate mortgage
Adjustable-rate mortgages usually, starts with offering lower rates than fixed rate mortgages over the repayment period. Subsequent changes in the lending market subsequently affect the payment rates of adjustable-rate mortgage loans.
This means that any homeowner will have to pay higher rates when there is a negative change in the lending market. Periodic adjustments result in rate increases that are higher than the rate available through a fixed-rate mortgage.
Securing a lower interest rate
Any homeowner will seek to refinance his/her mortgage loan if there is a lower interest rate available by the lender. This is usually brought about by a shift in rates the lending market.
Securing a lower interest rate helps you to save your money and also enables you to increase the rate at which you build equity in your home. Low interest rates also reduce the size of your monthly payment of your mortgage loan.
What to consider Before Mortgage Refinancing
Closing costs are the fees that a homeowner pays to the lender to compensate them for offering the loan. You may also have to make payments for legal documents and filings, appraisals, credit checks among others.
If you are seeking to go for a low interest rate mortgage refinancing, your closing costs will be relatively high. Similarly, if you go for a slightly higher rate, your closing costs will be relatively lower.
It is wiser to go for a relatively high rate to avoid paying higher closing costs of the initial mortgage loan you acquired.
Current Interest Rate
Any homeowner will opt to go for a lower interest rate available. However, you need to be keen on the amount you will pay in closing costs of your initial mortgage before deciding the rate you are applying for.
Your Credit Score
Credit score has to do with how you have been repaying your initial loans from your lender. The higher your credit score is, the higher your chances of getting approved for a refinancing by your lender.
If your credit score has improved from the time you got your original mortgage loan, then it will be easier for you to obtain a lower rate refinancing. You however need to consider your income and whether the new rate you are applying for will suit your monthly budget.