The chance to refinance a home mortgage loan is rarely missed by a homeowner who is struggling to make his minimum monthly payments on time but this is not always the best option for every homeowner. Being able to refinance a loan doesn’t always give you the bragging rights in your neighborhood. Instead, you should give some thought behind the timing of your decision so that you don’t end up making the wrong decision about your rising mortgage debt level. Remember that multiple refinancings can reduce the overall financial benefit so when you decide to refinance your home loan, you should make sure you make the best decision in order to make it the final one. Don’t be a refinancing junkie as this will hurt your credit score and make you less able to get new lines of credit at an affordable rate.
Determining your goal while you opt for refinancing
Before you take the plunge into refinancing, you have to ensure what you want to achieve through this entire process. You shouldn’t forget that a refinance doesn’t pay off your mortgage debt. It just restructures it in order to make repayment favorable for you. Reducing the interest rates is the most common goal of the homeowners who look forward to a refinance and some others feel that they could extend the term of the loan in order to lower the monthly payments. However, one of the main concerns for all prospective refinance loan borrowers should be to save money in the long run. You might want to ensure that the term extension of the home loan doesn’t make you pay more towards interest as this will make you pay more than what you owed.
When should you refinance your home loan?
Whenever you feel overburdened with the huge amount of debt that you owe on your mortgage loan and when the present interest rates are lower than what you’re paying, you should either think of refinancing your mortgage or getting a loan modification. You can use a mortgage refinance calculator to ensure that you take the best step forward with regards to calculating your savings amount. When you weigh the costs of refinancing your home loan, you have to consider how many months of low installments it will take to recoup the closing costs of the new home loan.
When shouldn’t you refinance your home mortgage loan?
When you have a poor credit score and you know that you won’t be able to take out a mortgage loan at an affordable rate, you must initially go for credit repair so that you can tell your lenders that you’re a creditworthy borrower who can certainly repay the new refinance loan without defaulting. If you have accumulated enough equity in your home, you’ll find it easier to refinance your home loan. Lenders usually require at least 20% of home equity but it is not necessarily true that you won’t qualify for a mortgage with equity less than 20%.
What is the concept of cash-out refinancing?
Apart from refinancing, if you want to free up some cash for repaying your credit card debt or renovating your home, you can go for cash-out refinancing where you can refinance a loan for an amount that is more than what you actually owe on your original mortgage. Suppose you owe $50,000 on your original mortgage and you owe $10,000 on your credit card debt, you have to take out a refinance loan of $60,000 so that you can use at least $10,000 for repaying your credit card debt. This will reduce replace high credit card interest with lower mortgage interest that may also be tax-deductible.
When you feel that you’re a good candidate for a refinance, you should go for it rather than wait for the rates to fall further since that might not happen for a long time. After all, there’s no way to know for sure when it is the best time to do so. Finally, don’t forget to manage your personal finances and repay the new loan on time so that there are no chances of a default.