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In any economic climate, it can be difficult to make the payments on a home mortgage. Between possible high-interest rates and an unstable economy, making mortgage payments may become tougher than you ever expected. Should you find yourself in this situation, it might be time to consider refinancing.
What exactly is refinancing? Refinancing is the process of getting a new mortgage for the purpose of lowering monthly payments, interest rates, take cash out of your home for big purchases, or to change mortgage companies. The first loan is paid off, allowing the second loan to be created, instead of simply making a new mortgage and throwing out the original mortgage.
What exactly are the advantages of refinancing your mortgage? One of the main advantages to refinancing is to obtain a better interest rate. As time goes on, many people usually advance in their careers, start making more money, and are able to pay their bills in a timely manner, increasing their credit score. By increasing your credit score you’re more likely to qualify for a loan with lower interest rates. These interest rates can have profound effects on your monthly payments, saving you hundreds. Some people refinance their home in order to make larger purchases, like a new car or to pay off credit card debt.
What are the risks that can follow if you refinance? There are times that penalties can incur when you pay your existing mortgage with a line of credit or home equity credit. Often times mortgage companies set provisions that allow them to charge fees for doing this, and sometimes these fees can cost thousands. Before finalizing your refinance, make sure your penalty is covered and that it’s worth it.
Most mortgage companies require borrowers to maintain their initial mortgage for at least 12 months before they can refinance. It’s best to refinance with the same mortgage company. Since it’s easier to keep an old client than getting a new one, mortgage companies allow refinances. They will not require a new title search, property appraisal, and so on. Many times they’ll offer borrowers looking to refinance a better price, so it pays to stay with the same company.
Why would borrowers want to refinance? First off they would want to refinance for the same reasons anyone else would, a lower monthly payment. It only makes sense if borrowers are planning to stay at the same home for the next couple of years. Borrowers should avoid balloon payments as they are only ideal for lower initial mortgage payments. Today, buyers can purchase homes with little to no down payments, but have to obtain private mortgage insurance (PMI). The insurance is protection for the lender in case the buyer fails to make the monthly payments. As the balance on the home decreases, the value of the home increases, making it easier to cancel the PMI with a refinanced loan.