Mortgage refinancing is when homeowners get a new loan to replace their existing or current loan. The current terms of their loan are replaced with an entirely new loan that comes with different terms, including interest rates.
There are multiple benefits of refinancing your home. Certain homeowners do this to pull out liquid cash from the equity they own in the property. Others simply need to lower their interest rate. Regardless of the reasoning, today we will discuss knowing when to take this action and refinance your current house.
When is the right time to refinance?
Personal finances change over the years. It can be through home equity, an increase in income, or a better credit score. No matter the case, access to better mortgage options is more plausible. A drop in interest rates means a better chance to refinance with a much lower rate. According to some experts, it makes the most sense to refinance a home when it will help lower the interest rate or shorten the loan term. Refinancing could also mean lowering the monthly mortgage payment.
Types of Refinance Mortgages
1. Rate-and-term Refinance
The goal of the Rate-and-Term Refinance is to save money. This means getting a lower monthly payment or paying less interest.
2. Cash-Out Refinance
Cash-Out Refinance’s goal is to allow the homeowners to tap into the home equity. Home equity is the part of the home that the homeowners actually own. The new loan is used to pay off the existing mortgage and the amount leftover is the one the homeowner is cashing out.
3. Cash-In Refinance
The opposite of cash-out refinance, cash-in refinance lets the homeowner bring the cash to closing to be able to pay the loan balance.
How it Works
Before successfully refinancing, these are the following things owners need:
- Homeowners must first determine the length of stay at the home. It only makes sense to refinance it if the owners plan to stay at the home for several years.
- Set a clear financial goal
- Check credit score
Knowing your reason for refinancing is important. Homeowners should know whether it’s to reduce the monthly payments, shorten the term of the loan or pull out equity.
When refinancing, the higher your credit score is the better refinance rates. Going into this process with a strong credit score will help you long-term.
Overall, there are many advantages to refinancing your mortgage. Homeowners need to assess their reasons whether it’s the perfect time to do so. Some of the main reasons to refinance are to reduce monthly payments and to save on interest in the long run.
Alex Capozzolo is a partner of Better House Buyers, a real estate company based in Georgia. If you have thought that I need to sell my house fast, we can help. Better House Buyers purchase land and single-family properties.