Experts’ Tips to Follow Before Refinancing Your Mortgage
Refinancing might still be an option for some homeowners but with current interest rates, this opportunity could soon come to an end. Refinancing only makes sense if it helps you reduce mortgage interest rate by at least 1 per cent, saving you hundreds of thousands of dollars every year. Here’s how you can tell if it’s the right time to finance you home.
What are the Advantages Of Refinancing?
One of the biggest reasons people decide to refinance their homes is to lower the interest rate and pay off the mortgage debt sooner. As you continue to progress through your career, earn more income and pay your bills on time, you can take advantage of your high credit score by getting loans at more attractive interest rates.
Another reason why refinancing is such a popular option among homeowners is because it gives them access to more funds for a major life expense such as buying a car or paying medical bills. For those who aren’t familiar with refinancing, the process works by taking loan out on your home equity for the second time using the home equity line of credit.
But before approving your loan application, the lender will appraise your home and determine what percentage of the equity they will loan you. Most people choose to spend the money from the refinance loan to improve the condition of their homes which ultimately raises property value (and hence the homeowner’s equity in it).
What are the Risks of Refinancing?
The biggest downside of refinancing your home is the penalty associated with the process. Paying down your mortgage with a home equity line of credit can incur high fees which usually amount to thousands of dollars. So while calculating the financial benefits of applying for a refinance loan, consider the high penalties which can sometimes cancel out the savings from a lower interest rate.
The entire refinancing process can become very costly to homeowners who often have to pay high attorney fees, bank fees and deal with lots of paperwork. However some of these costs, such as the bank fees, can be avoided if you really do your research and choose a lender that offers discounted or free refinancing.
How Do I Refinance?
The first thing to do before taking out any loan is evaluate your financial standing and consider how you’ll pay back the debt. For example, if you’re refinancing for the sake of renovating, which will eventually raise your home value, you can get back the amount you spend on the upgrade at the time of selling the house. But if you use the amount to pay for education, credit card debt or a new car, it might become much difficult to pay back the loan.
In most cases, it makes sense for borrowers to apply for refinance with their original lender. So before going out to shop for the best lender, contact your existing mortgage company and ask about the options available to you. This way if you do proceed with the refinancing, you won’t have to file the paperwork all over again.
Most mortgage providers and lenders have a waiting period of at least 12 months before allowing borrowers to file for refinancing on their homes, but not all lenders have the same terms. Therefore, it is important to discuss the details and restrictions on your original mortgage with your lender before making the decision to refinance.
While most borrowers apply for refinancing with the intention of lowering their interest rate, the option only makes sense if you’re planning to live in your home for more than five years because the additional mortgage cost will eventually be offset by the monthly savings gained over the long run.
Often the cost of refinancing includes a lot more than just the application and bank fees. The borrower may also have to bear charges for title search and title insurance which will cover any losses incurred by discrepancies in property’s ownership and value.
The lender will also charge a hefty fee for preparing the mortgage loan and hiring lawyers to conduct the closings. The borrower will pay this amount as part of the bank’s pre-paid fees when closing the loan.
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