Generally, the process of mortgage refinancing is replacing an existing home loan with a new mortgage. There are numerous reasons why you might want to refinance your home loan and, fortunately for those who hope to refinance their current loan, it’s usually not too complicated to do so. In fact, the process of refinancing is typically very similar to when you originally apply for a mortgage.
The main reason why refinancing is so popular is because there are a number of benefits that can come with replacing a mortgage. Some of the reasons why you might want to refinance your home loan include:
- Getting a lower interest rate on your mortgage
- Switching from an adjustable rate loan to a fixed one (or vice versa)
- Reducing the costs of your monthly home loan payments
- Convert your home equity into cash
- You can often reduce the mortgage term (which is good if you want to pay your loan off sooner)
While there may be other reasons why refinancing might be a good option for you, these are some of the most common.
Advantages of refinancing
Aside from being able to replace your current home loan with a new one that’s more beneficial to you, there are also quite a few other benefits that can come with refinancing your mortgage, such as:
- If you have enough principal paid off or enough property appreciation, you may be able to remove PMI (private mortgage insurance) from your loan, which could help to lower your overall monthly repayments
- According to a recent study, the average homeowner could save around $160 on their monthly payments by refinancing their mortgage – although this may not be the case for everyone
- Consolidating your first mortgage and HELOC (home equity line of credit)
Things to consider about refinancing
While refinancing a home may not be a bad idea for some people, it’s often best to consider your options carefully before you make the final decision. For example, it’s typically a good idea to do your homework to find out how your new loan will affect you and what you currently pay.
If your credit score has improved since you first got your mortgage, refinancing may be a good idea (since your score can often help to determine your interest rate and how likely you are to get an approval for your refinance). However, if your score has dropped over time, it may not to be wise to do so, as you’re likely to get a higher interest rate.
It can often be a good idea to take a look at your current loan balance, and if replacing your existing mortgage will be worth it in the long run. If you’re not bothered about the advantages that can come with refinancing, you may just want to stick with your current home loan instead.
The risks of refinancing a mortgage
While there are often a number of advantages that can come with refinancing a home loan, it’s not always the ideal option – mainly because there are some risks that can come with replacing your existing mortgage.
In some instances, you may find that the interest rate on your new deal will be more than it is on your current one, and therefore it may be best not to go ahead and refinance your loan.
Also, refinancing generally restarts the amortization process. This means that, if you’ve been paying a 30 year loan for 10 years, you’ll be making your repayments for a total of 40 years. Sometimes, this isn’t worth the additional costs in interest – although you could get a shorter loan term, so that your overall mortgage is the same as you originally intended (or even shorter, if you’d prefer).
In addition, by refinancing your current mortgage, your overall finance charges could end up being higher over the loan’s duration.