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Should I Refinance my Mortgage? If so, When?

Your mortgage might be one of the biggest investments you make in your whole life - and it can also help you reach your future financial goals. Refinancing your mortgage can be a great tool to help you reach those goals faster.


But is it the right choice? Here's a reference guide to help you decide if refinancing your current mortgage is right for you.

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What is a mortgage refinance?

It's simply getting a new mortgage to pay off your old one. As a homeowner, you'll have the chance to choose from all the types of mortgages available to home buyers. Knowing your options will help you pick the best loan for refinancing your house for the first time.


Why should I refinance my mortgage?

Refinancing can allow you to change the terms of your mortgage to secure a lower monthly payment, switch your loan terms, consolidate debt, or even take some cash from your home equity to cover bills or renovations.


Let's dig deeper into some of the reasons

you might want to refinance.


You need to change your loan term.

There are several reasons why homeowners might want or need to change their loan term. Here's more info on switching to a longer or shorter term.


If you're having trouble making monthly mortgage payments, a refinance can let you lengthen the term of your mortgage and lower your monthly payments. For example, you can refinance a 15-year mortgage to a 30-year loan to make a lower payment each month.

Keep in mind that lengthening your mortgage term might result in a slightly higher interest rate, as lenders consider inflation, and a longer term means more interest paid overtime. If you know your current payment schedule is not realistic for your income, a refinance can free up more cash for investing, building an emergency fund, or covering other necessities.


On the other hand, you can also refinance your mortgage to a shorter term. By switching from a longer term to a shorter one, you'll likely enjoy lower interest rates and own your


home sooner. Just make sure you have enough stable income to cover the higher monthly payments that come with a shorter term.


You need cash to pay off debts.

If you've been making mortgage payments, chances are you have equity in your home. Equity is the difference between your home's market value and the amount you still owe your lender. You gain equity by paying off your loan principal or by your home's value increasing. If your loan is more than 5 years old, you've probably built some equity just by making scheduled monthly payments.


A cash-out refinance allows you to use the equity you have in your home by replacing your current loan with a higher-value loan and taking out a portion of that equity as cash. This can be helpful if you need money to pay off other debts. It allows you to consolidate higher-interest debts spread across multiple accounts into one lower interest-rate loan and one monthly payment.


You want to do home improvements or renovations.

From fixing a broken HVAC system to upgrading your bathroom, you might need to invest in your home at some point. Using home equity through a cash-out refinance is better than taking out personal loans or putting charges on credit cards because refinance loans usually have lower interest rates.

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It's essential to remember that a refinance is still a loan, so get estimates from contractors or repair professionals before closing, to ensure you borrow the right amount. You don't want to be left with too little money to complete the job or take out too much and have unnecessary debt.


You want to allocate more to retirement saving.

The earlier you start saving for retirement, the more time you have to accumulate interest on your investments. If you have equity in your home but haven't maxed out your retirement contributions, a cash-out refinance can allow you to invest the difference and potentially make more money over time.


You can also use the cash-out refinance money to invest in your property. Upgrades can increase your home's value and curb appeal, which can lead to a higher selling price when the time comes.


Another reason to refinance is if you want to convert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. An ARM often offers a lower interest rate at the start, but after a fixed period, the interest rate can fluctuate. Refinancing to a fixed-rate mortgage eliminates this uncertainty.

 

Now, how do you decide if you should refinance?

You should also understand what mortgage refinancing entails and how it works. There are pros and cons, including closing costs, which you need to consider. Talking to a Mortgage Professional can help you estimate how a refinance would affect your monthly payment.

Timing is crucial too. Some periods are better for refinancing, so make sure to assess home values and interest rates in your area. Don't forget to check if you meet the requirements to refinance and how long the process might take.


If your credit score has increased since you first applied for the loan, you might be eligible for a lower interest rate. Lenders care about your credit score because it reflects how well you manage debt. A higher score means less risk for the lender and a lower interest rate for you.


Additionally, if interest rates are currently low, it's an excellent time to consider refinancing. A small difference in interest rates can mean significant savings over the life of your loan.

In conclusion, a mortgage refinance can put money in your pocket and answer many financial questions. But as a homeowner, it's crucial to find the right refinancing option for your specific situation before making a decision to refinance now or later.


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