Homeownership often comes with the responsibility of a mortgage, yet few homeowners are aware of the full range of options open to them when it comes to their home loans. Banking in Windsor gives homeowners the opportunity to switch to a mortgage with different features by applying for mortgage refinancing. Homeowners looking to reduce the amount of their monthly payments, obtain a lower interest rate, or switch to another type of loan can benefit from refinancing their mortgage.
Below is a brief guide on how homeowners can gain from mortgage refinancing:
What is Mortgage Refinancing?
Mortgage refinancing is the process of obtaining a new mortgage to replace an existing one. When buying a house with a mortgage, the money goes to the person who sells the home. When refinancing, the money from the new mortgage goes toward paying off the old mortgage. The old mortgage is paid off, and the homeowner is left with a new mortgage with different features.
Refinancing presents an opportunity for a homeowner to change the features of a home loan effectively. When refinancing, a homeowner can choose a different interest rate while also adjusting other aspects of the loan, such as term length. Switching to a new mortgage can save a homeowner money and help achieve other financial goals.
To refinance a home, a homeowner must apply for a new mortgage and be approved by the lender. The requirements for approval will be more or less similar to the original mortgage. A homeowner must file an application, navigate the underwriting process, and follow through on closing the loan.
When a Homeowner’s Financial Situation Improves
The terms of a mortgage always depend on the financial situation of the person applying for the loan. Income, assets, and credit score all play a role in determining the range of options available to an applicant. Since a homeowner’s personal financial situation can change over time, the range of mortgage options can also change. Refinancing allows a homeowner with an improving financial situation to obtain a new mortgage with relatively better features compared to the previous loan.
When Interest Rates Fall
Mortgage refinancing can also benefit homeowners when interest rates are falling. This is true even if the financial situation of the homeowner has remained the same. Interest rates are always changing, and lower rates make a mortgage easier to repay. Homeowners can take advantage of a drop in interest rates by switching to a new mortgage with an interest rate lower than their previous loan.
Switching to a Mortgage with a Shorter or Longer Term
Mortgage refinancing is also a way for homeowners to switch to a mortgage with a different length. A longer term will reduce the size of the monthly payment, but it will also increase the amount of time it will take to repay the loan fully. While the monthly mortgage payment may be lower for a longer-length mortgage, the total interest paid to the bank will be greater. On the other hand, a short-term mortgage will result in less interest paid to the bank in total, although the monthly payments will be higher.
Switching to a longer-length mortgage can be a smart decision for a homeowner facing financial uncertainty since it will lower the monthly mortgage payment. Conversely, a homeowner may choose to save on interest by switching to a shorter-length mortgage when an improving financial situation makes a larger monthly payment more affordable.
Switching from an Adjustable-Rate to a Fixed-Rate Mortgage
Adjustable-rate mortgages have a monthly payment that can change as interest rates rise and fall. The monthly payment on an adjustable-rate mortgage will be reduced if the interest rate drops, and it will be increased if the rate rises. This feature may be welcomed by homeowners when interest rates are falling. Still, some homeowners may find themselves uncomfortable with a mortgage payment that can rise unexpectedly if interest rates go up. These homeowners may prefer to switch from an adjustable-rate mortgage to a fixed-rate mortgage by refinancing. Fixed-rate mortgages have the advantage of a stable monthly payment, allowing for more predictable financial planning.
Cashing out Money from Home Equity
Home equity is the portion of the home that the homeowner owns. This portion typically grows with every mortgage payment since a part of each payment generally goes toward building equity. Homeowners can access some of their home equity with a cash-out mortgage refinance. When a homeowner refinances for an amount greater than what is owed on the previous mortgage, the difference between these amounts is paid out in cash. This can be an effective way for homeowners to access money when it is needed for significant expenses, such as renovations and children’s tuition.
Be Aware of Prepayment Penalties
Some lenders charge homeowners with a prepayment penalty if they repay their mortgage early. Mortgage refinancing may trigger this penalty since it involves the repayment of the earlier mortgage. In certain cases, the cost of paying this penalty may outweigh the savings gained from refinancing. However, this penalty can often be waived when refinancing a mortgage with the same lender. It is generally cheaper and more straightforward to refinance with the same lender that provided the previous mortgage.
Eligibility for Refinancing
Homeowners banking in Evans may be eligible for mortgage refinancing if they meet their lender’s criteria. The approval process is similar to that of the previous mortgage. The lender will examine factors such as income, assets, credit score, and other debts when evaluating whether a homeowner will be approved for refinancing.
In addition, the lender will compare the appraised value of the home to the amount of the requested mortgage. A mortgage refinance is more likely to be approved when the home’s value is higher relative to the mortgage amount. Falling housing prices make it harder for a mortgage to be refinanced since the value of the home may drop below the amount owed on the mortgage. On the other hand, it will be easier for the homeowner to be approved for refinancing if the value of a home has risen overtime after the mortgage was taken out.
Everyone’s financial situation is unique; a financial advisor can help individuals assess the benefits of mortgage refinancing.