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Refinancing a mortgage means to take a new loan to pay off your current one. Borrowers often consider it when they want to change their mortgage terms.
Refinancing often helps you save money and make your loan terms more beneficial. However, you must know the pros and cons of refinancing before applying for it to avoid making serious mistakes.
- Change the type of loan. By refinancing you can switch from adjustable to fixed rates and vice versa.
- Change the duration of the loan. A longer duration will allow you to make smaller monthly payments. A shorter one will help to save on interest rates.
- Cash out equity. If you need cash for any purposes, you can borrow it from your home equity.
- Consolidate debt. You can refinance several loans into one to make keeping track of payments easier.
- Avoid balloon payments. Some mortgages require big payments towards the end of the loan. If you don’t have the necessary sum of money, you can refinance and avoid these payments.
This type of mortgage refinancing leaves you with the same amount of debt. What changes is the duration of your loan and the type of interest rates (fixed or adjustable). It is a good idea to switch to fixed rates if the market rates are expected to grow.
Alternatively, you can opt for adjustable rates if you want to sell your house soon.
The term of your mortgage influences the monthly payments. If you can’t afford your current payments, refinancing for a longer term might be a good option. However, longer terms often mean higher interest rates.
Cash-out Refinancing
The equity of your home is the amount of money from its total value that you actually own. It increases as you pay back the loan. You can extract part of that cash and use it for different purposes (e.g. as a down payment for another loan, to pay off debt, for education, to renovate your house, and such). As opposed to other types of refinancing, cashing out equity will increase your debt.
Cash-In Refinancing
Cashing in is not a common type of refinancing, but it can be very beneficial in some cases. In this case, you pay a certain amount of money to reduce your current debt. If you have saved or received cash while paying for your current loan, consider cashing that sum in. It will allow you to get lower interest rates and get rid of PMI if you apply for a mortgage that allows you to do so.
- Expensive or risky mortgage. If your current loan is too much for you to handle, there are several ways to save money on it by refinancing.
- Lower market interest rates. Although lower market rates don’t guarantee lower interest rates for your mortgage, they definitely have influence over them.
- Better credit history. If you have paid the bills for your current mortgage on time and your credit history has improved, you can get better loan terms when you refinance.
- Better financial circumstances. Apart from your credit history, another important factor is your income. If it has increased, you can get better interest rates, or you can also consider shortening your loan term.
- Invest equity in home renovation. When you cash out, you can use the money you extract from equity for any reason you want. But it makes much more sense to refinance if you want to use it to improve the house.
- Monthly savings are worth closing costs. As any other new mortgage, refinancing comes with additional closing costs. For your refinancing to be cost-effective, you have to plan on staying in the house for longer than it takes for the savings to cover the closing costs.
If you are considering refinancing your loan, call us at (813) 284-4027. We will be happy to answer your questions and guide you throughout the process.
At Ebenezer Mortgage Solutions, our experienced mortgage brokers will make sure that refinancing is financially favorable for you at any given moment so that you don’t end up overpaying for your mortgage.
