(See also: Cash-Out Refinance)
What is Mortgage Refinancing?
When you refinance, you’re taking a new home mortgage and using the money — all or part of it — to repay an existing home mortgage. However, you’ll also be increasing your repayment amount, since interest accumulates over the loan term, so be sure to weigh the pros and cons before making your decision.
Getting your mortgage refinancing loan involves many of the same steps and expenses as your original loan, so the process should at least partly seem familiar to you.
Refinancing is most popular when interest rates are lower — this translates to lower mortgage loan rates, which in turn translates to substantially lower monthly payments as well as lower interest expenses. If your mortgage rate is higher than current rates, you may save money by refinancing. Refinancing can also be helpful in paying other debts, lowering payments, or liquidating your home equity.
By refinancing, you can also reduce your monthly payments by extending the period of the loan. Recently this has become a popular strategy, since borrowers can substantially save with an extended-term refinance mortgage. This savings can even be used to pay off the loan’s principal, which reduces your overall payment burden. However, you’ll also be increasing your repayment amount, since interest accumulates over the loan term.
You may benefit most from refinancing if you plan on remaining in your home for a number of years, or if you’ve built up substantial home equity. If you have considerable equity, you may be eligible to refinance your existing mortgage loan to one with a larger amount, with interest that may be tax deductible.
Please consult with a financial advisor to determine if a refinance loan is best for your particular situation.
Another important aspect of refinancing is risk mitigation, particularly in the case of adjustable-rate mortgages (ARMs), which are characterized by ebbs and flows in the interest rate. You can refinance to convert an ARM to a fixed loan, which locks in a steady interest rate over time and may stabilize your monthly payments.
Refinancing can be an excellent option if you’re looking to pay off high-interest debts such as credit cards, auto loans, or second mortgages, which often carry higher interest rates than a refinance mortgage. By refinancing at a lower rate, you can apply your net savings to paying down your debts. Refinancing may also reduce your monthly payments, since your monthly interest charges are decreased.
Tax benefits are also another upside to refinancing, which allows you to transform non-tax deductible debts (for example, credit cards) into a home mortgage, which may be tax deductible. This has the added benefit of lowering tax liability, helping put homeowners in a lower tax bracket. Consult a tax advisor to determine if you may qualify for tax benefits.
Types of Refinancing
Cash-Out Refinance: With a cash-out refinance, you can get more than the amount owed on your current mortgage. The extra money can be used in many ways, including paying off other outstanding loans. This can be quite helpful, since the interest rate on a refinance is typically lower than rates on other debts such as credit cards or car loans. As opposed to a personal loan, the interest on a cash-out refinance may be tax deductible. Again, consult a tax advisor to determine if you may qualify for those deductions.
Bad Credit Refinance: Bad credit refinancing may be an option if you have equity in your home. It can help you to reduce your interest rate, consolidate your debt, or change the term of your loan. Bad credit loan refinancing will allow you to incorporate your debt into the amount owed. Please consult with a financial advisor on whether refinancing with bad credit is right for you.