There are many cases where you have to take the route of doing a refinance of your home from different mortgage prospects. Today, refinancing is a popular way to quickly access cash, consolidate debt and pay for home improvements.
Refinancing a mortgage can have many benefits including a lower interest rate and monthly payments, refinancing from an adjustable-rate mortgage to a fixed-rate mortgage, or reducing your term to pay your loan more quickly. However, staying within your mortgage term may be a better option if the refinancing costs come with better means.
Since refinancing involves wrapping up your current mortgage and paralleling to a new one, the total cost may be similar to what you paid for the mortgage on the initial one. Refinancing fees can add up to as much as 5% of the loan amount, depending on where the property is situated. The fees and total costs may include:
So, the question is, should you refinance?
Before you consider a mortgage refinance, ask yourself questions that matter to you.
How Old is My Current Mortgage?
If you're well into your current mortgage term, evaluate how many years of mortgage payment refinancing you want to go with. It doesn't make good financial sense to begin a 15, 20 or 30-year mortgage if you only have ten years left to pay your current loan amount. In the long run, you end up purchasing a mortgage if you refinance, even if the interest rate and monthly payment is on the lower side.
Plus, you pay interest primarily for the first few years of your total current mortgage. The same applies to a refinanced mortgage. Instead of making headway on the principal amount, as you have been, you'll be back to nearly paying the payment as per the mortgage rate.
If your mortgage has a prepayment lower rate, you may be charged a fee if you refinance your loan because you are dealing with the mortgage refinance process. Overall, check the terms of your loan regarding any prepayment penalty period and penalty amount. If you incur a prepayment penalty, add it to the refinancing fees for an accurate assessment of payment overdue.
If you're planning to move within the next two or three years, you may not want to refinance the mortgage. Managing the cost of refinancing takes time, where you can quickly figure out how long by dividing the total expense you'll pay in fees by the amount you want to go with. The result is the number of months to break for the new loan accordingly. If you're going to sell your home before that valid point, refinancing differs on each rate.
Has the price of your home dropped, requiring you to refinance over the current value of a home? Or are you trying to get out of the block of the mortgage loan? Mortgage loans that don't have an 80% loan-to-value ratio may require you to pay private mortgage insurance (PMI) from the mortgage lender as per your choice.
PMI protects your lender in case you default on your loan amount but premiums can add a significant amount to your monthly payments.
Your credit score is what determines your interest rate for a new mortgage term. The total point differentiator in your credit score could result in thousands of dollars in interest payments for a 30-year mortgage, depending on the total amount of expense, according to FICO (formerly known as Fair Isaac Corporation). This company created the first credit score system.
If your credit score has taken a hit since you took out your current mortgage, you may want to improve your credit score before the investigating mortgage refinance options. Your credit score is the point of reflection to your credit history and it changes as a new guide to your mortgage amount.
Remember, mortgage lenders typically check your credit score from different mortgage websites. The RateShop.ca website has a wealth of information about the connection between credit scores and mortgage rates.
Like many financial transactions, mortgage refinance is one of the top processes and requires due diligence on the part of homeowners considering it. Speak with a reputable lender for quick answers to some of your concerns. This will help you make the important decision as to whether refinancing is right for you.