It can give you some extra cash for a vacation, house renovation or even help you get married. It can save you some money on interest. You can pay less monthly payment on your mortgage and use the extra money for something else. Wait, there’s more. For people who are in debt, it can get you some cash to settle it. What is this wonderful thing that can do so much for you? You would have probably guessed by now. Yes, it is refinancing.
You may have heard of such comments about refinancing before. Refinancing has many advantages and it is a good financial tool. However, everything has its good and bad depending on the circumstances and reasons for doing it. Under certain circumstances it may actually work against you and your financial goals. It may be a good idea but it may be wise not to do it just because other people are doing it and you don’t want to feel left out. And don’t do it because others say it is a wonderful opportunity and you don’t want to feel stupid for not grabbing it.
It may be advisable to first evaluate if refinancing is beneficial for your financial situation. Here are some pointers you may want to use as a guide:
Cash-out: If you need a sum of money to pay for essential things like home improvements, consolidation of debts, your child’s education or to pay for medical bills, refinancing may be a good choice for you. But it may not be wise to use it for luxury items like a sports car, a high-end sound system, the state-of-the-art home automation system, or other things that you normally cannot afford. If you wish to do this, you would need to have equity on your home. Equity is the dollar-value difference between the value of your home and the amount you owe on your mortgage. The difference would be what you can hope to get in cash.
Save money: If you just want to save some money for future use or set up an emergency fund it may be a viable option if the refinancing mortgage rate is lower than your current mortgage rate. The lower the rate, the lower the repayments. You may be able to enjoy lower rate if your credit score has improved or the rate is sliding due to market conditions.
To prevent foreclosure: If you are facing foreclosure you may consider refinancing. It can help to lower your monthly payments and you can save your home.
Switch mortgage type: If you have an adjustable rate mortgage (ARM) currently you may feel uncomfortable that the rate might just increase without any warning. You could consider switching to a fixed-rate mortgage and lock in the rate now. Even if the rate changes in future it will not affect you.
Mortgage refinancing may not be as easy as it sounds. It may be good to know what it takes before you take the plunge. You could start by having a clear picture about your finances and current mortgage. You may do up a summary that includes current mortgage balance, monthly payment, loan terms, interest rate, value of your home, monthly household income and expenses, debts and your credit score. Once you have this information ready then you may be better equipped to shop around.
It may be advisable also to learn about refinancing procedures and documents required. You could find out more about mortgage rates and make comparison between a few lenders. You may try to get the one with lowest rate and good terms. Most lenders provide substantial information online but if you need more in depth explanation you may speak to their consultants or loan officers.
by: Ask Bill