If you’re unhappy with your existing mortgage as it is, mortgage refinancing could benefit you in the long run. Before refinancing a mortgage, however, be aware that this can either be a smart money move, or it can be a financial disaster.
Understanding Mortgage Refinancing
Financial experts would most likely be able to regale you with complex and flowery terms while they try to explain what mortgage refinancing really is. Unfortunately, the Average Joe will often find these descriptions difficult to understand, and even downright confusing.
Basically, though, mortgage refinancing involves getting a new loan and paying back your old loan or loans. You would then be making payments on the new loan.
When to Consider Mortgage Refinancing
There are a number of reasons why people refinance their mortgages. One of the biggest advantages of mortgage refinancing, for instance, is getting lower monthly mortgage payments. This can be achieved a few different ways. First of all, some borrowers may find that by refinancing their mortgages, they are able to secure lower interest rates, particularly if their credit has improved since they got their original mortgage. Borrowers might also consider mortgage refinancing to switch from a variable interest rate to a fixed interest rate or vice versa.
Lengthening the term of the new loan, which can also be achieved by mortgage refinancing, can also help lower your monthly mortgage payments. For example, some borrowers may find that by refinancing their mortgage to a 30 year term, they can save hundreds of dollars each month. Of course, in the long run they will also usually pay more in interest.
On the other hand, some borrowers may be looking to shorten the term of their mortgage when they consider mortgage refinancing. Although this type of mortgage refinancing option will usually result in higher monthly payments, borrowers will typically end up paying less in interest, since more of their mortgage payments go toward the principal of the loan.
Borrowers who have built up equity in their homes might also want to consider refinancing their mortgage, since it can give them access to large amounts of cash. For example, if a borrower owes $200,000 on their existing mortgage and their home is appraised at $250,000, they have built up $50,000 in equity. By refinancing their mortgage for the value of the home, the borrower can pocket the difference, which in this case would be $50,000. The money received can then be used for such things as putting a child through college, paying off credit card debt, or even remodeling the home.
When to Avoid Mortgage Refinancing
Although there are a number of advantages of mortgage refinancing, not everyone is in the position to do so. There are several things that you should consider before refinancing your mortgage.
First, consider the cost of the mortgage refinancing, both in the short term and in the long term. For instance, will you be able to afford the monthly payments after refinancing? Are you comfortable with paying more in interest in the long run, even if it means that you’ll have lower monthly payments?
You should also consider how long you’ll be living in the house before you consider mortgage refinancing. In general, mortgage refinancing is best for borrowers who plan to stay put for years. If they plan to leave within a few years, they could be stuck with a mortgage that is higher than the actual value of their home.