Home loans can be one of your biggest bills each month. It can be tempting to look at your home loan as the best place to try and save some money each month. There are some things that you should know before you make this kind of a change to your loan, however. The process of refinancing is not as simple as you might think and there are some best practices that you should keep in mind when choosing the time to make this change.
Refinancing will often bring your home loan payment down but it will also impact your credit as a credit pull needs to be done to confirm that you are able to afford to make this alteration in your payment. You will also increase the term of your loan in most cases, especially if you take out some cash against your loan at the same time.
If you are ready to learn more about tips on when you should refinance a home loan, you need to read on!
Tips On When You Should Refinance A Home Loan
Refinancing your home loan can be a great benefit for your needs if you need to get some money out of your equity in cash or if you want to end up with a more favorable loan rate for the life of your home loan. You will need to remember that a refinance will impact your credit negatively, and if you have a lot of other credit challenges, you might not even qualify for a refinance.
This is a lot like starting your home loan over again, and even if the loan rate is more favorable for your needs, you will want to consider that your credit will show a hit related to the new loan and you will have to start paying on your loan from the beginning essentially.
1. To Get a Better Rate
The best reason to refinance your home loan would be to take advantage of lower interest rates. Sometimes you have not had a choice about the kind of interest that you have had to pay when you bought your home and it can be a nice option to reduce the interest on your loan so that your payments are smaller and the loan term is shorter overall.
Housing interest rates can fluctuate aggressively sometimes, and these are the best times to make sure that you take advantage of the improved rates that you are offered. If you are not able to bring your interest rate down by at least a few points, it’s probably not worth impacting your credit and refinancing your loan.
2. To Shorten the Term
When you have a reduced interest rate, you can also reduce the term. This can be a big help if you want to pay off your loan sooner and if you are interested in making sure that you get to the part of your loan payment cycle where you are paying more into the principle than the interest. Even small interest rate changes can reduce the term of your loan significantly.
Shortening your loan term can be a good idea if you want to eliminate your housing payment each month and if you are contemplating selling in the next ten years or so or retiring. There are many reasons why you might want to shorten your loan term to pay off your home more quickly and a refinance can make this easy to accomplish.
3. Debt Consolidation
This is one of the most common reasons that people refinance their homes. When you have a lot of debt that you need to take care of, the equity in your home can be a great way to get a large amount of cash to take care of other bills. This is a refinance option that should not be used over and over again, however, because it will add to the term of your loan each time and it will impact your credit each time as well.
Remember that you might not have a better option to attend to your debts, but you will be essentially starting your home loan over fresh if you choose a cash-out refinance for a large amount of debt. Refinances can be a great way to take care of this kind of problem but this refinance option should be used wisely.
4. To Change to a Fixed-Rate Mortgage
Fixed-rate mortgages are often a much better deal than other mortgage types and you will want to consider this for your needs if you want a stable monthly payment and do not currently have one. When interest rates are falling, this is a great choice to get you into a stable payment situation that is offered at a great rate.
Fixed-rate mortgages will be charged the same payment amount each time the payment is due which can be very helpful for your needs if you are trying to watch your budget or you are getting close to retirement or another major life change.
Refinancing a Home Loan can be a Big Help
When done for the right reasons, refinancing your home loan can be a big help to your finances. If you were forced to get a loan with a very high-interest rate or you want to tap into the equity in your home to finance other projects or pay off debt, a refinance might be the perfect solution for your needs. You will want to consider that this process will hit your credit and you will also need to think about the fact that you are basically starting the home loan process all over again.
These things being said, there are some situations where a home loan refinance is the best financial decision that you can make and you will be glad that you took the time to look into making this change. Always get the advice of an expert at your bank or another lender before you jump into a home loan refinance unprepared.
Article Submitted By Community Writer