Is refinancing a home loan a sound financial decision to make? It is important to weigh the pros and cons of home loan refinancing before choosing either way.
What can influence a person’s decision to opt for home loan refinance? You have to understand fully the concept of refinancing. The property that you own may be your most valuable financial asset. Hence, it is important to be cautious in choosing a lender or broker as well as particular mortgage terms. Keep in mind that there are costs aside from potential benefits in refinancing.
Pros and Cons of Home Loan Refinancing
When you choose to refinance home loan, you settle existing mortgage and move to a new one. There is also the alternative to combine primary and secondary mortgages into one new loan. In refinancing, you may go through in obtaining the same processes, problems and costs all over again. Multiple home loan refinance can bring down your total financial benefits. However, there are circumstances when a mortgage refinance makes sense. On the contrary, it may be more practical to simply stick to your current home loan.
Before you even decide whether or not to go for refinancing, it is a must to resolve what you want to achieve. The home loan refinance does not eliminate the debt but only restructures it frequently at a lower interest rate and different terms instead of the current mortgage. The common target in refinancing is to reduce interest charges. Nonetheless, some homeowners also realize the ability to extend the loan drop out to 30 years and lower monthly installments. Another aim of refinancing is debt consolidation. If you possess a first mortgage and home equity loan, combining the two into one fixed-rate home loan evens up the payments.
Scenarios for Considering to Refinance a Home Loan
There are five possible reasons for considering refinancing an existing mortgage.
- Bring down monthly payments from a high to a lower fixed rate. If the rate is 7.5% and a homeowner opts for a 6.5% rate, savings on the mortgage will be one percent less the costs of refinancing.
- Improve your cash flow due to lower installment. Cash flow may be stretched after you transfer to a new home. You can switch to an adjustable rate program where the rate is fixed for the next three to ten years. If you have a 20-year home loan term, moving over to a 30-year term can improve your cash flow.
- Choose a fixed rate scheme to get rid of payment changes for adjustable rate mortgages. Homeowners with one year adjustable rate mortgage will see their rates go up as rates increase. You can refinance for lower fixed rates utilizing programs which have rates steady for three to seven years.
- Take out funds from the equity in real property. If you need cash for home improvements, tuition fees or debt consolidation, you get the chance to refinance 75% to 80% of the current value of the home provided it has been owned for one year or more.
- There are shorter loan terms. The best incentive in home loan refinance is through refinancing into a short-term loan and keeping loan payments stable at the same time. A borrower can save money in terms of interest by reducing loan terms.