How to Refinance Your Mortgage - Pros and Cons

Refinancing a mortgage loan enables you to replace an existing loan with a new one that has a more favorable interest rate. 

One major reason most people refinance is because of a slope in interest rates. Nobody wants to pay a high-interest rate when there is a better offer with refinancing. 

Nevertheless, you have to quickly evaluate yourself, know your financial goal, and see whether you qualify with a good credit score and if refinancing is a better option for you at this time considering its pros and cons. 

What Does it Mean to Refinance Your Mortgage?

When you refinance your mortgage: 

• Your bank or lender pays off your old mortgage with the new one
• You get a low-interest rate and shorten payment term
• Cash-out the equity you have earned on your home.

How Does Refinancing Work?

Having a good knowledge of refinancing and how it works is a good start toward your goal.

Evaluate

The first step to take before you refinance your mortgage is self-evaluation. You have to evaluate to see if you meet up with the requirements that qualify you for refinancing your mortgage, not just on getting a loan but one with a sustainable low rate. 

You will have to consider things like your credit score (a credit score of 650 for most lenders qualifies you for a refi, but a higher score may enable you to get a lower interest rate). 

Your employment history, whether you have a steady job with a steady income, and your previous loan payment history. At this point, you should also determine what kind of refinancing you will go for.

Choose the  Best Lender

Compare different rates and terms from lenders, knowing that they offer different interest rates. You will have to do a walk around by searching for which lender offers the best loan rate that suits your demand. This will save you a huge sum and not fall prey to huge interest rates. Also, comparing loan terms, most lenders offer 15, 20, or 30-year loan terms. 

Apply for Refinancing

You will be required to submit specific financial documents during the application process, some of which were stated in "1" above. They are also the same documents you submitted when you first applied for a mortgage. It is expedient for you to make them available for these processes. These documents are:

• Recent pay stubs
• Recent W-2s
• Bank statements
• Tax returns
• Business income statements

Lock in Rates

Once you have a favorable interest rate, it is wise to lock in that rate because rates can change at any time. To secure the current rate until your closing date, which is usually 30 days, you have to lock in the rate to avoid rate hikes. Though some may prefer to float their rates instead of locking them in, it is risky to float your rates.

Closing on Loan

This is where closing cost applies, you close on your loan when you pay all the listed fees

on the closing disclosure. At this your refinancing loan is ready.

Reasons Why People Refinance

There are a few reasons why I consider refinancing. Here are five reasons why you may want to do a refi.

1. Decline in Rates

Whenever there is a fall in interest rates, refinancing your mortgage loan is a good option because it offers you a lower rate where you can save more money. For instance, suppose you have a $250,000 loan on a 30-year fixed term with an interest rate of 5%. If the interest rate drops to 4%, the difference is 1%. This is a reasonable drop to reduce monthly mortgage payments and enable you to save hundreds of dollars.

2. Get Cash-out

People take advantage of their home equity to get extra cash from refinancing. When you refinance with a larger loan and pay off your original mortgage, you have extra money to sort out other personal needs, projects, renovations, etc. This could be a better way to earn extra cash.

3. Changing Loan Terms

When there is a reduction in the number of years fixed for a loan, one can qualify for a low-interest rate. Let's say a 30-year term is changed to 20 years on a rate and term refinance. You will secure a lot of savings in a long run, though you will have to pay more on monthly basis.

On the other hand, if one is having difficulty paying off a loan monthly, the loan term can be increased from 20 to 30 years to enable easy payment. This will incur more expenses from interest over the years.

4. Swap to a Fixed Rate

Swapping from an adjustable-rate mortgage (ARM) to a fixed-rate loan is another reason to refinance your mortgage loan. The fact that ARMs can change over the years and result in a rate increase, will certainly affect your monthly payment. Doing a refi to change from an adjustable-rate mortgage to a fixed-rate mortgage is an excellent way to save you from future troubles in a rate increase.

5. High Credit Score

You can opt-in for refinancing if your credit score has increased over the years since the time you took a loan. A high credit score will lower your interest rate when you refinance. 

Your credit score reflects your borrowing and repayment history. With a high credit score, you may qualify to get a lower interest rate.

Are there Costs in Refinancing?

The process of refinancing is almost identical to when you first secured a mortgage loan. As interesting as it may be to refinance your mortgage loan because, of low-interest rates, one of the major things you have to take into consideration is the extra cost that comes with refinancing loans.

The good faith estimate is a document that includes the interest rate as well as a breakout of the projected expenses to close the loan. it reveals all possible costs involved in refinancing a loan from a particular lender. You will have to compare costs from different lenders to make a good choice of a lender before embarking on a refi.

Pros and Cons of Refinancing

Just like a two side coin, refinancing has a good as well as a negative side, you may want to consider both before you continue with your goal.

Pros

• When you refinance your mortgage with a lower interest rate from a new lender, you can save more money by reducing the monthly payment for your loan.
• Once your home equity is above 20% your lender can eliminate your private mortgage insurance based on your current loan terms.
• you can swap to a fixed-rate mortgage with refinancing, from an adjustable-rate mortgage (ARM) when you perceive there will be a rise in interest rates.
• You can pay off your loan faster with refinancing when you opt for a shorter term on a low-interest rate.
• When your home value rises, you can get cash-out on your home equity when you refinance your mortgage.

Cons

• Refinancing has a closing cost which will incur a good sum. You might want to avoid refinancing when you work the maths and discovers it doesn't worth it.
• When you change terms by adding more years to the loan, you will likely pay more on interest because of the number of years added.
• You will reduce your home equity when you do a cash-out refi.
• You will have less cash to live on by the month when you do a refinancing with shorter loan terms.  

Bottom-line

After establishing your objectives, refinancing can be the ideal solution to your current demand. For your closing costs and other closing expenses, make sure you shop around for the finest lender with the lowest interest rate.