Refinancing a home is a great way to restructure your mortgage. Aside from shortening the payback period, a well-executed refinance can decrease the total amount of interest you pay. To ensure that your refinance achieves its intended result, take time to understand the process before you apply for a new loan.
What is a Refinance?
A refinance allows you to obtain a new loan and use the proceeds to pay down your existing mortgage or other debt. To refinance, you’ll go through a closing process. You’ll incur related costs which can total 3-6% of the outstanding principal. You should choose to refinance only if it improves your overall debt situation. Taking advantage of equity available in your house can also help you pay off existing debt (such as credit card debt or a family member’s educational expenses).
What Are the Benefits of Refinancing?
Refinancing may give you the option to shorten the term of your loan and pay off your mortgage faster. Achieving a favorable interest rate is another benefit of refinancing. Refinances also allow you to swap an adjustable interest rate for a fixed rate and vice versa. Paying down principal in conjunction with a refinance will lower your outstanding principle. This may get your balance below the point where you’ll need to pay Private Mortgage Insurance (PMI).
When Does a Refinance Not Make Sense?
You don’t want to go through the process of applying for a new loan only to end up owing more than you can safely handle. Small interest rate improvements may look attractive, but the total amount of savings over the life of the refinanced loan should exceed the initial costs associated with refinancing your home. You may wish to calculate an estimated breakeven point for a refinance to determine how long it will take you to recoup your closing costs. If you’re planning to move in the near future, it may not make sense to incur the cost of a refinance if you’ll just need to pay for a new mortgage a few months down the line.
Refinance During Bankruptcy
Often, an inability to meet the obligation of a monthly housing payment plays a role in bankruptcy. After filing for bankruptcy or surrendering a previous property, many homeowners wonder if they will be approved for a future refinance. Generally, you only have a limited amount of time after filing bankruptcy to refinance. However, if you work to improve your credit and have a stable income, lenders may be able to work with you. The government offers specialized programs, like HAMP, to assist those struggling with mortgage payments. Thus, it’s important to discuss your options with a qualified mortgage lender if you are having difficulty managing your mortgage payment.
Refinancing a home is one way to lower your payments, particularly when interest rates fall. If you’d like to adjust your current mortgage and gain more favorable terms, don’t hesitate to call a qualified lender to ask about refinancing solutions.