In today’s scenario of low interest, refinancing a mortgage not only helps you in money-saving. However, it can also help homeowners to get the money that they built up in their homes. Also, a mortgage refinance can lower monthly payments. So, before making a choice, it is important to understand how refinancing works, how can you get the best benefit from it.
What is a Mortgage Refinance?
So, a mortgage refinance is the process to roll up your ongoing mortgage into a new home loan. In this process, your home loan lender will tell you the current market value of your home. Also, with this, the lender will check your credit and verifies your credit and tax return history. After verifying them successfully, the lender will provide several plans to lower your monthly payment, and also reduces the number of years from your home loan.
Why should you Refinance your Mortgage?
There are many reasons why homeowners decide to refinance their mortgages. One of the biggest reasons for this is to save their money on a monthly payment of loans. it can be done by refinancing i.e, by moving to a lower interest rate. So, let’s discuss some of the benefits of mortgage refinance:-
It reduces the payment by lower interest
As discussed earlier, if your interest rate is higher than the current one, then you can save money through refinancing. Just take an example, if you have a mortgage of $250,000, if you lower the interest rate from 6% to 3%. Then it would save over $400 per month on the payments alone.
Reduce your payment by eliminating PMI
If you purchase your home with a down payment of less than 20%, then probably you have to pay Private Mortgage Insurance (PMI). Therefore, refinancing a mortgage once you have 20% equity can cut out the PMI payment. Which results in more savings.
Shorten the length of your mortgage
If you are deciding to sell your home or want to get out of the trap of monthly payments, then shortening the length of your mortgage will be helpful. Converting the 40- year mortgage to 20- year home loan can help in building your equity faster, which will result in more options for your home.
Converting to a fixed rate
The adjustable-rate mortgages (ARM) are a good option for the initial term of 3 to 5 years, which can spike your monthly payment after it is over. Therefore, if you refinance your ARM, then it can provide you a fixed rate for 10, 15, or 30 years.
How to refinance your mortgage?
Refinancing a mortgage must not be the faster decision. You have to decide by going through the pros and cons of mortgage refinance. After understanding the pros and cons, you will be able to decide your goals and steps to get your financial goals. Set a goal for mortgage refinance. Before deciding to refinance, you have to set a required goal for a new mortgage. Are you determined in saving money with your monthly payment? or do you want to take out the cash to complete the debt or fund? Thus, by determining a simple goal, you can decide the best option for refinancing.
Check your credit score
Keep in your mind that in every transaction which involves credit, you must know your credit score before applying for refinancing. Going through your credit report will give you a deeper insight. You can highlight the errors, improve your credit score and plan your credibility. If you apply with a bad credit score, you may not get the best options.
Select a mortgage refinance lender
Once you understand the credit score, you can select the preferred lender for yourself. After getting the best option, you can lock your rate with the lender. It is important to lock options as early as possible because mortgage rates change every day.
Close your refinanced loan
After you have locked the rates, the lender will start the wrapping up of the process. It will include all kinds of paperwork with income and tax verification. Lastly, in the final step do not forget to sign all your closing paperwork. Then be prepared with the ID card and cash required to close it.
So, now that you understand the benefits and working of mortgage refinance. Therefore, you can make a good decision about refinancing your mortgage. Refinancing is a good option if it saves your monthly payment. However, if you are out of your working place then it is good news for you. For this, you might be able to lower your mortgage payment and also put it on hold for the next 12 months. Therefore, the best time for refinancing is the time when it is suitable for your financial goals.