There are instances when refinancing your home seems like a really good idea. But you need to be really sure about your reasons because this is one of the financial decisions that can affect your future. After all, your mortgage is probably the biggest loan that you will ever take on. If you make a wrong decision about it, the amount that you owe could pull your finances under.
Mortgage debt continues to be the biggest part of the average household debt. According to the data from the New York Fed, the total mortgage debt as of the third quarter of 2017 is $8.74 trillion. On a positive note, the delinquency rate is lower. This means there is a decrease in late payments. But then again, it can easily turn around when the economy turns for the worse. A job loss or a medical emergency could force someone to be left unable to keep up with their mortgage payments.
So what can you do to keep this from happening?
Obviously, you need to be aware of opportunities that will help improve your mortgage situation. If you can come up with a debt relief plan that will make payments easier or more bearable – that should be a good idea. If you can save money on this debt, you need to grab it.
One of the things that you can do is refinancing your home. Some people do not think that your debt cannot be solved by another debt. However, there are cases wherein it can really improve your financial situation.
4 reasons to consider refinancing your mortgage
There are 4 important reasons why you should consider refinancing your home. Make sure you know what these are so you can identify if they are applicable to your specific credit situation.
Current rates are low
You need to pay attention to the interest rate being set by the Federal Reserve. The rates that they set will dictate how the rest of the banks and financial institutions will set their respective rates. If they set it higher, your mortgage lender will probably follow. But if they set it low, the same effect will happen. Then again, how can you take advantage of lower rates if you have a fixed mortgage?
The solution is to get a refinancing. You want to get a new loan because it will surely have lower rates than what you have – thanks to the ones set by the Feds. Of course, you have to make sure that you will be approved at a lower rate. That means you should have a good credit score – among other things.
Financial situation is different
It is not surprising for your life to be different than when you first borrowed your mortgage. Your priorities were different and most likely, your financial situation has changed too. When you applied for the mortgage, you may have been single – or you and your spouse childless. Now, you might have a kid or two that require your financial assistance. This will change your priorities significantly and can affect the way you pay your mortgage.
You need to consider these changes so you can make the necessary adjustments to your finances too. Refinancing your home will help you adjust. You can either pay more towards your mortgage if you have a higher income. This will help you pay off your mortgage easier. Or, you can take advantage of the new loan to lower your monthly payments. If you have a better credit score, you can also opt to get a new loan so you can get better terms (e.g. lower interest).
Another reason to refinance is when you have other types of debt like credit cards, personal loans or even car loans. If you can get refinancing for a lower rate than what you currently have, it is better for you to get a new loan, pay off the other debts, and settle for just one. This is how debt consolidation happens. Not only will you be taking advantage of lower interest rates, the single monthly payment that replaced the multiple ones will be easier to monitor. The chances that you will miss a payment will be less likely to happen.
Not only that, mortgage payments are one of the few debts that are tax deductible. You can take advantage of that to reduce your taxes.
Lingering effects of the housing crash
According to statistics, 10 million families lost their homes during the housing crisis. If you were one of the few people who were able to hold on to their houses, you are probably still reeling from the financial strain that it cost you to do just that. If you did not ruin your credit score in the process, refinancing your home may be a good idea. It will help make your financial burden easier to carry. At the very least, you should try to lower your monthly payments – if that is what will help you to gain more control over your finances.
How to make sure refinancing will work for you
It seems like refinancing is gaining popularity recently. According to reports during the third quarter of 2017, people have rushed to refinance. This caused mortgage applications to rise by 6.3%. While the reason to refinance is not specified, we cannot deny that this is proof that borrowers want to improve their personal finances.
While refinancing your home may be a good idea given your specific financial situation, you still have to be careful when you push through with it. You need to understand what it can or cannot do to your finances. Sometimes, if you approach refinancing the wrong way, it might not help you at all. In fact, it might just do the opposite and ruin your financial situation. Even worse, it might just make you lose your home.
This is why it is important for you to approach refinancing the right way. To do this, there are a couple of things that you need to do.
Have a high credit score
Start by making sure that you have a good credit score. This will ensure that you will be given a low-interest rate. Obviously, the low rate is an important factor in refinancing your home. If you will end up paying more because of a higher interest rate, then refinancing does not make sense at all.
Know the duration of the loan
This actually depends on your financial capabilities. Ideally, you should get a shorter loan term. Combined with a lower interest rate, this will really help you save a lot of money on your payments. However, if you want lower payments, that is also okay. Even if it makes the payment terms longer. The important thing is to make sure that you can completely pay off the debt. So make sure the duration will help you reach a payment that you can afford.
Pay more each month
When you refinance your home loan, you might want to increase your monthly payments. This is one of the best ways to take control of your mortgage payments. This will really help you get out of debt faster. If you are getting a new loan, try to get one that does not have a prepayment penalty. This will allow you to make bigger payments whenever you have the money to do so.
As you can see refinancing your home still takes some planning for it to succeed. You do not just refinance your mortgage. You have to make your calculations to make sure that it is really what your finances will need.