Refinancing can help you obtain a better interest rate and reduce the monthly payments on your mortgage. If you have a decent credit rating, refinancing is also an opportunity to move from a variable loan rate to a fixed-rate mortgage or even raise finance for an upcoming purchase. And these are just a few of the reasons you might want to refinance your mortgage in the near future.
Is Refinancing Your Mortgage the Right Option for You?
Refinancing is when the initial mortgage is paid off and a second loan is created with new terms and conditions. It’s especially enticing during times of economic or financial stress, for keeping up with mortgage payments is a challenge and refinancing can help relieve some of these persistent strains.
However, refinancing is not always a good idea and this is certainly true for borrowers that might have a significant amount of debt. It’s true, even if your friends or family have found “the best interest rate”, this is not an indication that refinancing is good for you, or anyone else for that matter.
There are also certain pitfalls that might not make refinancing a financially sound idea. For instance, stretching out payments over a longer period might reduce payments in the short term but you will still end up paying more interest on the principal later on.
That being said, here are some of the most common reasons why people turn to refinancing.
Why You Might Want to Refinance Your Mortgage
- Funding a Purchase – Some homeowners decide to refinance in order to raise money for home remodeling, while just as many use this process to pay for a child’s schooling. Instead of taking out another loan with higher interest rates, refinancing can make a lot of financial sense.
- Variable Rate to Fixed Rate – If you plan to stay in the home for the foreseeable future, changing from one type of loan to the other is another reason to refinance your mortgage. Proper guidance (and math) is needed for this option but this should go without saying for refinancing in general.
- Personal Emergency – Refinancing is sometimes the fastest way to raise money to cover a financial emergency. Now, that’s not to say you should refinance your mortgage for this reason but rather to explain how refinancing is occasionally a better option than taking out a separate loan.
- Consolidating Debt – You can also consolidate debt when you refinance your mortgage. Most debt comes with high interest rates which will often make refinancing a more sensible option. That being said, it’s important to deploy discipline and not waste this opportunity by generating more debt.
With this in mind, the overall purpose of refinancing is to provide some kind of financial benefit and careful consideration is needed to determine whether this is the best option in each circumstance. As for the process, it’s necessary to collect bank statements, pay stubs and any other documents to support a refinancing application. The lender will also require an application fee before proceeding with an appraisal and other formalities that take place when you refinance your mortgage.
It should go without saying that your own personal finances and circumstances will dictate whether or not you should refinance your mortgage. But careful consideration is necessary and expert advice will bring peace-of-mind at the very least. After all, without the right guidance or knowledge, there is always more risk but the above reasons should tell you why refinancing can make a lot of sense.
If you’re considering a mortgage or refinance, or to learn about any of our home loan services, speak to the pros at City Creek Mortgage today.