If you find that you are having problems making the payments on your mortgage, due to higher interest rates, the type of mortgage you have, or other personal financial issues, it may be time for you to consider refinancing.
In a nutshell, refinancing is the process of getting a new mortgage to replace your original one. The mortgage lender pays off the first loan and replaces it with the new one rather than creating the new one and eliminating the first one.
If you have good credit history, then refinancing allows you to get a better interest rate on your mortgage, change your loan from an adjustable rate to a fixed rate mortgage, or change the term or even the balance of your loan. You can refinance using your existing mortgage lender or choose a new one, depending on what you want to achieve and who is able to help you get there.
Types of Refinancing
There are three main types of refinancing:
Should You Refinance?
If you need money or want a lower interest rate, you may think, “Why not refinance?” You have to make sure that refinancing is in your best financial interest. First of all, it costs to refinance – after all, you are, in essence, getting a new mortgage. And that means home appraisal costs, loan origination fees, closing expenses, just to name a few.
Also, you need to make sure that your numbers add up. For example, if you are hoping to get a better interest rate, do you know if your savings on the interest rate will eventually offset the costs of refinancing? If you are choosing a cash out refinance, do you really need that money, and are you able to afford the increase in your mortgage comfortably, both monthly and across the life of the mortgage?
Finally, if you do not plan on staying in your home for long-term, you may not recoup your costs, even if with a lower interest rate.
Your Next Move
Although the prospect of saving on your mortgage or having extra cash is exciting, don’t be ruled by your emotions. You will need to expend time, effort, and money to refinance. If you do your homework and make an informed decision, refinancing can be a great way to come closer to financial freedom.