Refinancing is a financial concept that is catching up lately and it has a valid reason for it too. Ideally, refinancing your mortgage will pay off your existing home loan and will replace it with a new one.
The potential benefits of refinancing may include receiving a more favourable term like lower interest rate or lower monthly payments or switching from an adjustable-rate to a more certain and reliable fixed rate.
Refinancing can also help you tap into the equity of the home to help cash out which can be used for more productive reasons like home improvements.
While refinancing has its fair share of upsides, here is what you need to know before you get into it.
1. Know how you can qualify for refinancing: in order to qualify for refinancing, you will most likely go through an approval process that is similar to what was originally needed for your loan. There are three factors that come into play:
It may not be news to you, but the rule still remains the same: the better your credit score and income, the better terms will be available for you.
2. Understand the rates and terms: fine print can be harder to get by; there’s a reason it is printed to finely. But you have to go through it all, considering the fact that it takes your signature of approval at the end. Before considering a mortgage refinance, it is important to know what interest rates, monthly payments and loan terms may be available to you. Even something as low as half a percent of difference in rate could mean thousands, or even ten thousands of dollars in savings over the life of your loan.
3. Consider cash-out chances: a cash-out refinance ideally allows you to take funds from your home’s built-up equity. What is equity? It is the difference between your home’s current market value and the mortgage balance remaining. You could use this cash for any purpose, including paying off high-interest credit card debt. Many even consider home improvements as it helps build back equity and increase its appraised value.