As home mortgage rates fall, many homeowners think about refinancing. Refinancing may have advantages over your original mortgage. However, it’s important to understand how the advantages impact a refinancing loan beforehand.
Advantages To Refinancing
Refinancing offers 4 popular advantages:
- By converting an ARM (adjustable rate mortgage) to a fixed mortgage rate, you get a consistent rate and standard payment.
- Reduces the mortgage payment by: changing the kind of loan; lengthening the term or lowering your rate. (Extending the term will increase the total amount of loan interest you pay.)
- If the length of your mortgage loan is shorter, you can save thousands of dollars in interest. Check if you can afford a higher payment and compare it to the money you save. Alternatively, you can pay a little more each month towards the principal.
- Receive cash from your home equity through “cash out refinancing”. If a substantial amount of principal has been paid, you may be eligible for this type of loan. You can use it to pay a high interest debt or to add large improvements to your home. Before you agree to this loan, remember the extra interest and principal costs.
Important Things To Understand
Ask a trusted lender help you clearly understand:
- The total cost, before you sign.
- The 20% amount of equity required by lenders, that’s provided by higher home values or from what’s been paid on the principal. A government program might help if you don’t have enough equity for regular refinancing.
- How many months will it take before the reduced payments result in real savings, after paying the refinancing charges? If you’re refinancing costs $5,000, payment gets reduced by $200. It will require 25 months before saving begins.
- The mortgage loan’s term may become longer and increase the total interest and principal paid.
- Refinance fees may not be recovered if the home is sold too soon.
Refinancing Requirements
- Determine your debt-to-income ratio
- Recent Credit report
- New Appraisal
- Refinancing administrative charges
- Fee for underwriting
This information will help you get the right type of refinancing.
