Reasons to Refinance a Mortgage (Refinansiering Kredittkort)
Before you decide to refinance a loan, it is important to understand why you should do it in the first place.
One of the most common reasons is to lower the interest rate. We can also call it rate-and-term refinance. It is the most popular reason household owners decide to do it.
You should enter here to learn when to start with refinancing process.
If your current mortgage or loan comes with high interest rate, refinancing can help you reduce the overall amount you will spend on it.
At the same time, you can shorten the term or reduce monthly payments, depending on your preferences.
Today, we live in the low-rate environment. However, the connected between mortgage rates and Federal Reserve’s target rate is complex. Still, when we reach a point of low rates, it means it is less expensive to borrow money than before.
Remember that short-term mortgages come with low interest rates compare with longer-term options. That way, you can paying in less time, which means you will have higher monthly installments.
Therefore, choosing a rate-and-term refinance can help you save money in a long run, especially if you have enough money to handle the entire process.
The main goal is to afford to reduce the term of loan, which will ultimately lower your rate, but boost the monthly installments. Since you will pay mortgage faster, you will not waste time on interest the same as long-term options.
The Best Reasons
1. Consolidate Debt
In case you have enter the point of high-interest debt on personal loans and credit cards, you can use cash-out refinance option, which will help you save money in the long run and boost the cash flow among other things.
Even if you take higher interest percentage, you will still benefit because credit card debts are problematic to handle in a long run. Of course, this option comes with specific disadvantages especially if you cannot handle the mortgage interest.
In some cases, the amount you can take exceeds the balance you must pay, which will affect your overall efficiency. Some people choose cash-out loans to conduct home improvement project that allows them to build home’s equity.
Still, the credit card debts are problematic because when you take a loan to handle them, you can easily make another issue in the future that will affect your situation and leave you a bad credit.
Therefore, you should be as careful as possible when moving forward and determine whether you can reduce the chances and afford new terms before making up your mind.
Some experts state that the only way for a refinancing to make sense is to reduce the interest for at least one percent or more. Even if you lose a deductibility, you can save money and prevent the future debt.
2. Remove Mortgage Insurance
Some home loans come with PMI or private mortgage insurance. When you decide to refinance everything (Refinansiering), you can lower monthly expenses.
This is specifically important in case you have insurance from the Federal Housing Administration or FHA. Generally, FHA loans are perfect aspects of owning a household especially if you do not have a great credit score.
Still, they come with a disadvantage which is mandatory insurance. The premium you need to pay upfront is 1.75% of the overall amount combined with annual mortgage insurance premium of 0.85% of the loan amount in the next thirty years.
The amount will add up over time, which can leave a serious strain on your household. If you wish to remove PMI from the equation, you can refinance an FHA loan and create a conventional mortgage with at least twenty percent of home equity.
1. Save Money for a New Household
Refinancing is not free, which means you will pay at least two percent or more for closing expenses. Therefore, you will need a few years to return the money.
In case you decide to move to another home before returning the costs means you will lose it even if you reduce the monthly payments in the meantime.
Therefore, if you wish to move in the next few years, we recommend you to avoid refinancing. The most important reasons for that is because the expenses of refinancing may outweigh the advantages.
2. Luxurious Purchases After Cash-Out Refinance
Your home equity is not an ATM you can use to go to a holiday or a wedding. You need to understand that doing it is highly dangerous and problematic for your specific situations.
When you take advantage of cash-out refinance to purchase a new RV, vehicle or other luxurious items, the choices can lead to problems in a long run.
Of course, it may seem tempting to use the money especially at low rate, but you are placing your household as a collateral. Therefore, if you enter a trouble, you won’t be able to tap the equity, while you will risk a household.
You should take advantage of tangible benefit to refinance, which is important aspect to understand. The worst thing you can do is to spend the money for something that won’t provide you with an additional security and financial picture.
3. Long-Term Loan
Lowering your payments and taking advantages of lower rates is a perfect move. But it is not a great idea if you are halfway through the thirty years period.
Before you make up your mind, the most important factor is to determine the interest percentage you will pay until you finish everything. Another important factor is the overall length.
Since the mortgages come with specific amortizations, most payments in the early year include interest. However, only when you reach the second fifteen years, you will pay down the principal.
When you reach the final half of the mortgage, including fifteen years of 30-year mortgage, the worst thing you can do is to refinance, because you have reached a point of paying more principal than interest.
However, if you refinance, the amortization will start from the beginning, which will reduce the chances of paying the principal the same way as before.
4. Pay Off Mortgage Faster Than You Should
Choosing a shorter-term loan can help you pay everything off faster than before, but that may affect your other financial goals.
As a result, most of your debt expenses will depend on the house, which means you won’t have enough money to contribute retirement, college fund, and making additional investments that will offer you high ROI.
The main goal is to check out each aspect and compare your current term and rate with the refinanced option. The shorter term means higher interest, which will translate into more significant monthly installment than before.
Still, choosing long-term options means you will end up paying larger interest compared with short-term options. Everything depends on your current financial situation.
5. Recently Purchased a Household
After a first year, rate can easily drip from the fixed amount you have chosen. Therefore, you may think to refinance everything to obtain lower rates, however, that is not something you should do.
Watch this video: to learn the entire process.
Instead, you should wait a few years because when the rates drop to a minimum, in the next year it will become higher than before.
Although it may be beneficial for you at first, you may enter a vicious circle where you won’t be able to refinance again. Therefore, you should wait for a perfect moment before you make up your mind.