Refinancing a loan is a seemingly complicated process that people tend to avoid because they believe that changing anything when it comes to a loan can increase debt, or because they do not fully understand the process and the great benefits it offers. If you have heard of refinancing but are unsure whether this is the right step for you, then the following explanation will give you a better idea of what refinancing your mortgage is all about. This will help you make more informed decisions to improve your financial stability and security.
In its simplest forms, refinancing a mortgage loan means trading in one loan for another. Although this sounds extremely counterintuitive, it is quite great if you think about what you get out of this process. Refinancing a loan is basically getting another loan with a different interest rate and time period without having to go through the tedious process of applying for a loan and getting approved all over again. You just have to get some documentation for your lender and request the refinancing. There are many benefits that homeowners gain from this step, some of which we’ll delve into below.
1. Shorter Time Period
Sometimes, people get loans with a really long time period to pay them off. While this seems great at the beginning because you will have significantly lower payments to make on a monthly basis, no one wants to remain in debt for thirty-plus years, especially if they have the finances to pay off the loan in a shorter period of time. Refinancing will allow you to decrease the amount of time you will be in debt. If you do some calculations, you will notice that you will be paying much less for your house than if you keep your original mortgage in place.
2. Lower Interest Rates
Another great benefit of refinancing is lowering the interest rate that you are paying for your mortgage. This will also affect the final amount you pay since less interest means lower payments. Interest rates often depend on the economy. You need to study different interest rates before committing to a new home loan to figure out whether it is the best time for refinancing. Knowing the right time to refinance will ensure you are not doing yourself a disservice. Lower interest rates also mean that you can adjust the timeline of your mortgage payments so you get out of debt much faster.
3. Ability to Cash Out Equity
When you are a homeowner, chances are you will be spending money doing renovations and improving your home in general. These improvements increase the value of your home significantly. Refinancing ensures that this value is taken into consideration which in turn increases the value you can cash out for various needs such as more renovations or even paying for things such as college tuition. People often feel like refinancing their mortgage loan is better than getting a new loan to pay for their children’s tuition because mortgages often have lower interest rates than regular loans. Plus, you do not have to go through a lengthy process to get approved for refinancing as you would if you try getting a new loan.
4. Lock in a Fixed Interest Rate
Some homeowners out there have AMR or adjustable mortgage rates. This means that their interest rates are not fixed. Although it seems like quite a steal at the beginning, over time you may find unwanted surprises and there will be little you can do to get away from increases in interest rates. Refinancing your mortgage allows you to change this agreement so that you have a fixed rate to follow no matter how high-interest rates become later on.
5. Increased Short- and Long-Term Savings
If you think about it, getting a new home loan and discarding your old one means that you are going to be paying less money for the same thing. This means that your short- and long-term savings will definitely increase. If you are able to get a lower interest rate, then you will have more money to put into savings in the short term. Likewise, if you are able to pay off your mortgage in a shorter time period, you will be able to allocate more money to your savings in the long term. Either way, it is a win-win situation.
There are certainly many advantages to refinancing. Now that you have a better idea about mortgages and why refinancing is the way to go, it is time to contact your lender and find out what you need to do to refinance your home loan as soon as possible. In no time, you will be able to gather the necessary documentation and be the proud debtless owner of your own home.