Are you in need of a home loan, but don’t have the credit to skip the bank’s waiting list?
Or maybe you’ve been paying off your mortgage, but now you’re looking for a lower interest rate and/or a different lender.
If that sounds like your situation, then refinancing might be for you! Learn more about what it is and how to go about it from our handy beginner’s guide below.
What is Refinance?
It is the process of changing and replacing the terms of an existing credit arrangement, most often a loan or a mortgage.
You can then use the money you owe to pay off some of your current mortgage debt, which means that you can then lower monthly payments.
How Does Refinancing Work?
The first step to refinancing is to figure out how much you owe on your loan so far. If you’re just starting to pay on your mortgage and started making payments in the most recent month, then that’s the amount you’ll need in order to refinance.
You’ll usually have a portion of the mortgage money left over after paying off interest.
In order to get the best possible results from refinancing, it’s important to be able to clearly understand how it works and what benefits and drawbacks you can expect.
What Are the Benefits of Refinancing?
There are a number of benefits that you can get out of refinancing, including:
When you refinanced your home loan, you can lower your monthly payments and save some money on interest. If you want to save money for the future, this might be really beneficial.
The difference between the amount that you owed before refinancing and after is the amount of money that you saved!
While you’ll generally have a loan term of 30 years when you refinance, this doesn’t mean that it’s set in stone. If the interest rate drops again in two or three years, you can use refinancing to lower your mortgage payments again and keep the same loan term.
Putting Money Away
If your house has equity, refinancing could be a terrific method to put money that you don’t need right now into a growing account. Just make sure to keep some money available for closing costs if you plan to close on your refinancing in the next few months.
With refinancing, you can consolidate all of your debt into one loan and make the monthly payments much lower. That means that both of your interest rates are fixed, so you don’t have to pay interest on the extra cash that you save.
Pay Off Your Mortgage Sooner
If you’ve been trying to pay off your mortgage in full, refinancing is a terrific option to do it without jeopardizing your credit. With most lenders, these days, you’ll be able to pay off your mortgage debt sooner with refinancing.
What Are the Disadvantages of Refinancing?
There are various disadvantages to consider before refinancing, such as:
Increased Monthly Payments
Many people think that refinancing will lower their monthly payments over time, but this doesn’t always turn out to be the case.
Depending on how long you’ve owned your home and how much the market’s changed since you bought it, refinancing may only save you a little bit of money each month.
A Longer Loan Term
Refinancing your loan will allow you to extend your loan term up to 30 years, giving you more time to pay off the total amount of the loan. This is another great thing about refinancing and will save you over the long run, but it’s something that you should consider before refinancing.
No Closing Costs
Since refinancing involves a new loan, there aren’t any closing costs involved.
You can get the loan with no maintenance or administrative fees. However, many people find that they need to pay off some of their principal balance sooner in order to avoid paying interest on it.
How Is Refinancing Different from a Loan Modification?
A loan modification differs from refinancing in that it involves asking your lender for assistance in decreasing your interest rate or cutting your payments. Refinancing is a different process that can lead to a lower interest rate than a loan modification, so it’s important to differentiate between the two.
A loan modification is when your lender takes less money from you in order to lower your monthly payments.
Refinancing, however, is when you put a new loan against the value of your home so that you can pay off some of what’s owed and lower payments.
The process of refinancing a mortgage may also be different from state to state due to different laws and regulations, though many homeowners find it significantly easier than trying to get a loan modification.
The process of refinancing is designed to lower monthly payments and may result in a lower overall interest rate.
This may be a suitable alternative for you depending on your circumstances; consider yours to see whether it makes sense. By making an informed decision, you can save money, live more comfortably and enjoy the benefits of a debt-free tomorrow.
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