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Have you heard of refinancing but aren’t exactly sure what it means or if it applies to you? Given the current economic uncertainty brought on by the pandemic, it’s becoming more difficult for some people to make their payments on time. Instead of defaulting and paying the price with high interest rates and penalties, you might consider refinancing to help you meet your goals or make your financial situation a bit more manageable.
What Is Refinancing?
Refinancing is the process of replacing your current home, auto or personal loan with another one that has different terms.
Essentially, you’re shopping around to see what else is available to you that may not have been when you first borrowed. Be aware though, that breaking your mortgage early will result in a financial penalty, so make sure you do your research to understand the process and the risks before you commit to anything.
Why Do People Refinance?
Understanding why refinancing is helpful will go a long way in determining if it’s a good solution for your personal needs. There are typically three main reasons why you would refinance:
1. You Want A Lower Interest Rate
Choosing to refinance to get a lower interest rate can save you a lot of money over time, depending on the prepayment penalty and the size of your outstanding loan of course. Don’t let the prospect of a penalty deter you, though. Take the time to crunch the numbers and learn more about whether the risk will be worth the reward, because it often is.
2. You Need Access To Money ASAP
Refinancing your mortgage can help you access the equity in your home (up to 80% potentially). This extra money can be used for investment purposes, saving for your child’s education, making some much needed renovations etc.
3. You Want To Consolidate Your Debt
If you’ve got enough equity in your home, you may be able to use it to pay off high-interest debt. If you have multiple outstanding debts (for example, a car loan or a line of credit, etc.), you may be able to consolidate this debt through mortgage refinancing.
|Potentially lower your interest rate and save money||The penalties could outweigh the savings|
|Access the equity in your home||Accessing equity puts you into more debt|
|Consolidate your debt with a lower rate||Consolidating debt removes your incentive to pay your balance down sooner|
|Swap to a variable or fixed rate||Switching rate types isn’t always in your best interest|
What Are The Pros/Cons?
Refinancing is a huge financial decision and shouldn’t be made on a whim. While it can potentially save you thousands of dollars over your term, there are also risks associated with refinancing that you’ll want to be aware of before you make any big decisions.
How Do I Refinance?
Whether you’re contacting your current lender or looking elsewhere, there are some important steps you’ll want to take to ensure you’re prepared:
1. Check Your Credit Score
Tie up any loose ends that could cost you the opportunity to refinance by making it seem like the lender is at risk by allowing you to make this transition. Refinancing is like applying for a loan all over again so keep that in mind.
2. Create A Budget
Knowing what you’ll qualify for and how you’ll repay the loan are integral. Take the time to create a simple budget for yourself so you have a plan in place in advance.
3. Understand The Costs
Before you choose to refinance, make sure you have a solid grasp on what costs are associated with doing so. Remember that it pays to shop around, but make sure to protect your credit score while you do it. Working quickly is the key to ensuring your credit score doesn’t take a hit every time you run a hard inquiry for a loan. Credit scoring models will view multiple hard inquiries for the same type of loan as a single inquiry as long as they all happen within the span of 15 – 45 days.
Refinancing can be a smart way to save money over the course of time or gain access to the financial means necessary to fund new projects or investments, but it can also be a risky decision that ends up lowering your credit score in the process. As with any other financial decision, it’s important to do your homework and weigh your options before you make any drastic moves.
Want to learn more about refinancing and if it’s right for YOU? Contact us to get the conversation started.