To be clear, refinancing is replacing an existing debt obligation with another different debt obligation and with different terms. There are various reasons why a loan may be refinanced such as taking advantage of a better interest rate, consolidating other debts into one loan, reducing the monthly repayment amount, switching from a variable-rate to a fixed-rate loan or to free up cash for a longer term.
There are several ways you can refinance a loan such as with a fixed-rate mortgage. A fixed rate mortgage is a mortgage that has a fixed rate for the entire length of the loan. The main point of this type of refinancing is that the interest rate of the loan stays the same throughout the loan. Many like this loan because one doesn’t have to worry about the fluctuation of interest rates. And, a person will pay less in interest and have consistently lower monthly payments.
Another method of refinancing is adjustable-rate mortgages. This method of refinancing has a lower initial interest rate. However, over time, the interest rate will go up and down, depending on how the market conditions change. This may be a good option for some; especially those who are stuck with a high interest rate in their fixed-rate mortgage.
Cash-out refinance is another method of refinancing. This method involves getting a new, larger mortgage to pay off the existing balance of a loan and to receive extra cash. This extra cash can be used to consolidate and pay off debt, finance home improvement, pay for a child’s education or other needed options. However, there are risks with this option such as incurring additional tax consequences or possibly losing your home.
Keep in mind; there are advantages in refinancing such as getting a lower interest rate on a mortgage. Refinancing may also help to get rid of your mortgage debt in a more timely manner. There are several reasons why some want to refinance such as shortening their loan. Another reason is to lower your payments. By refinancing a loan at a lower interest rate, you could reduce your payment and save a lot of money in interest. By lowering your mortgage payment, you could obtain hundreds of dollars each month that could be invested or saved.
Refinancing from an adjustable-rate mortgage to a fixed-rate loan helps to plan and budget more effectively and efficiently and can protect you from rising interest rates in years to come. However, there are several reasons why it may not be a good idea to refinance; especially if you have had your mortgage for a long time. If you restart the amortization process, most of your monthly payments will be credited to paying interest again and will not build equity.
Another reason why it may not be a good idea to refinance is that your current mortgage may have a prepayment penalty. Some lenders charge a penalty if you pay your mortgage loan early. Still another reason is if you plan to move soon. It is also important to not refinance a home that is going down in value. If you do, you could end up with an “upside-down” mortgage; especially if property values go down even more.
To conclude, refinancing can be a good thing; however, before engaging in a refinancing deal, be sure to put together necessary paperwork for a loan, get your documents to the lender quickly once your lock in a rate, communicate often with your lender and know what to expect.