Are you finding it difficult to pay the monthly mortgage amount with the current term and interest rate? And are you planning to refinance your mortgage for an improved rate of interest and loan tenure? You have landed at the right place!! Refinancing is getting a new mortgage to replace the older one. During refinancing a mortgage, the previous loan amount is paid off by creating a second loan.
Borrowers having a decent credit score and handsome credit report highly appreciate refinancing their mortgage to convert a variable loan rate to a fixed one. There are high chances of getting a second mortgage on low-interest rates while refinancing. However, refinancing can be pretty risky for borrowers having a poor credit history. If you are wondering when should you refinance your mortgage, keep reading through to find solutions to your queries.
What are common reasons for refinancing?
The economic crisis caused due to COVID-19 pandemic has made it difficult to make regular payments on a home mortgage. The high interest rates and the unstable economy is making it tougher to make mortgage payments than expected. Individuals who find themselves in such situations consider refinancing the best option for lowering the burden of their head. Refinancing will basically involve having a new mortgage to replace the existing one but with potentially different terms.
Below listed are some common reasons to refinance:
- Borrowers are likely to get offered a low rate of interest when they choose to refinance their mortgage.
- Since refinancing provides a fixed rate, unlike the adjustable ones, it is highly preferable.
- Refinancing eliminates private mortgage insurance.
- Refinancing your mortgage shortens the term of your mortgage, which allows the borrowers to pay off the loan amount sooner.
- Borrowers can also choose to increase the term of the mortgage so that they have to pay low monthly payments. Individuals who do not have a consistent cash flow or a fixed source of income usually choose this option.
TIP: you can also use the home mortgage affordability calculator to calculate your EMIs associated with the new loan.
How does mortgage refinancing work?
Getting a new mortgage to replace the older one is briefly termed as refinancing. Like the initial loan application process, the borrower has to go through the same procedures of getting a new home loan again. The initial procedures, including loan application, underwriting, home appraisal, and closing, are all repeated once again. However, the difference this time is that instead of purchasing a new house, you’ll keep your current home.
After you submit the application for the new loan, the lender will evaluate your eligibility. Before granting the loan amount, they will minutely look at your credit score, debt-to-income ratio, and employment history.
While refinancing your mortgage, the borrowers can choose to go to the previous lender or find a new one. As a borrower, you must know that you will also have to pay closing costs and fees, which is around 3%-6% of the value of a loan.
You must have understood by now if you should refinance your mortgage now or not. However, in this case, you must make wise decisions in regard to your finances.