Home refinancing is a big step, and it's akin to going through the same process you went through when you first bought your home. After all, you're essentially selecting a new lender to take over your mortgage at new terms. You'll need to compare companies, submit paperwork, and have your home appraised. The process often takes more than a month to complete.
However, this shouldn't stop you from considering a home refinance. If you can receive more favorable terms in your new mortgage, you can save a significant amount of money over the term of your loan. In addition, you can also use it to lower your monthly payments or to receive a cash payout in order to pay expenses or renovate your home.
How do you know if you should go through the home refinance process? Below, you'll learn about three cases where you'll likely benefit financially.
Interest Rates Have Dropped Since You First Got Your Mortgage
The primary reason why homeowners decide to refinance is to take advantage of a recent drop in interest rates. When the federal prime rate drops, mortgage interest rates will drop along with it. If interest rates are much lower now compared to when you first bought your home, you'll likely be able to save a substantial amount of money over the course of your mortgage by refinancing it.
Keep in mind, however, that there's a flat fee associated with every home refinance. You'll need to pay closing costs, the application fee, and the home appraisal fee. The home refinancing loan officer will give you an estimate of how much you'll save in interest compared to the costs associated with refinancing, which allows you to see how soon you'll be able to recoup the costs of the refinance by paying lower interest rates on your mortgage.
You're Having Trouble Making Your Monthly Mortgage Payments
Sometimes it makes financial sense to refinance your mortgage even when you won't save money on interest by doing so. If you can't make your monthly mortgage payments, refinancing your home and extending the term of the mortgage can be a good way to make them more affordable. A home refinance is a much better financial option than a foreclosure, even if you may end up paying more over the term of the loan.
For homeowners with substantial amounts of debt, a cash-out refinance can be a way to create more space in the budget for mortgage payments. Credit cards and auto loans almost always have much higher interest rates than mortgages. A cash-out refinance allows you to receive a one-time cash payment based on the amount of equity that you have in your home. You can use this payment to pay off credit card bills or your auto loan, eliminating their monthly payments. The money you save each month can be used for your mortgage payment instead.
If you're in danger of becoming unable to pay your mortgage, it's always a good idea to start the home refinancing process as soon as possible. When you start missing payments, refinancing becomes significantly more difficult—most lenders won't accept applicants who have missed two or more mortgage payments within the past year.
Your Credit Score and Income Have Significantly Improved Since You Bought Your Home
As with any loan, the interest rate in a mortgage is based on the homeowner's income and credit score. A client with a low credit score is a riskier client for the mortgage company, so they'll be charged a higher interest rate in return. If your credit score and income have improved substantially since you first bought your home, you may be able to save money over the term of the loan by refinancing your home.
Overall, home refinancing is primarily a way for homeowners to save money by taking advantage of lower interest rates. If you're in a financial bind, however, then it can also allow you to keep your home by lowering your monthly mortgage payment or enabling you to pay off large debts.
If you think that refinancing is a good option for you, the first step is to contact a lender that provides home refinancing services. The lender's loan officer will work with you to find a monthly payment that works for your financial situation, and they'll also be able to tell you how much money you'll save over the course of the mortgage.