In today’s turbulent economy, homeowners have been faced with all kinds of hurdles and challenges, which have stretched their finances to the limit many times. It should come as no wonder that they often turn to the option of refinancing their home and question if it’s the right decision for them. Before jumping in, signing the papers, and making it official here’s a look at what refinancing means and when it makes sense to go ahead with it.
What Does Refinancing Your Home Mean?
For those unfamiliar with what refinancing a home means, it is the process in which you pay off the current existing amount of the mortgage loan and then get a new loan. The loan could be for the exact same amount or it could be a higher amount that you borrow. If you plan on borrowing more than the existing loan, then you will need to use the equity you have built in your home.
You home’s equity is the value of the ownership that you have built up over the years when looking at the current market value of the home. In other words, the difference between what you have left owing on the loan and what its current market value is.
Top Reasons to Refinance Your Home?
While there can be a number of reasons you wish to refinance your home, there are a few that are much more common than others. These include:
Consolidating Debt – Many people turn to refinancing as a way to consolidate debt. This debt could include other loans such as a vehicle, credit card debt, and even student loans. Trying to get out of debt can be difficult, especially if you are only making the minimum payments.
What’s important to understand is that consolidating through refinancing isn’t wiping away that debt, rather it is rolling it into your mortgage. You will still be paying it off, but chances are you’ll have longer to pay it off and now you’ll have just one payment to worry about instead of multiple payments. You will also want to consider how much interest you will pay over the course of paying it off in the mortgage versus paying it off with its existing interest.
If you plan on consolidating debt through refinancing, then you will need to secure the loan with the equity in your home.
House Renovations and Remodeling – Another reason for a home refinance is to pay for renovations, major repairs, or a remodel. It will give you the cash you need to go ahead with these projects.
A Way to Lower Your Monthly Payments – Interest rates are constantly changing, and if they have gone down since you originally got your mortgage many years ago, then refinancing could be a great option. You will get to take advantage of the lower interest rates, which means your monthly payment will go down. You may even choose to keep your payment the same, but now you’ll be able to pay it off in less time, which means being mortgage free.
Take Advantage of a Higher Credit Score – Your credit score plays a role in the interest rate you are offered. When you first bought your house perhaps your credit score was just average, or a little below average. If that’s the case you weren’t likely offered the best rate out there. If you have noticed your credit score has gone up over the years, it can be a good idea to jump on this and take advantage of it. You may find that you qualify for a lower interest rate, which means more money in your pocket.
Even if you manage to get an interest rate drop of just 1.5% on a $300,000 mortgage that still equates to a $250 savings per month! That’s a rather significant saving.
When Should You Not Refinance Your Home?
In terms of situations where it doesn’t make sense to refinance your home, there are a few. For example you never want to refinance if the interest rate is higher than your existing loan. As well there may be fees involved with closing your existing loan and then opening a new one, and these fees can be quite high. If you can’t afford to pay for them out of pocket, then there’s a good chance it’s not worth proceeding.
Be Informed and Proceed with Confidence
By taking the time to learn about refinancing, you’re sure to find the best solution for your personal financial needs, allowing you to proceed with confidence.