How is refinancing your mortgage done and why should you do it? Getting a new mortgage to replace the original is called refinancing. Refinancing is done to allow a borrower to obtain a different, and even better interest term and rate. 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.
Another way to look at refinancing – it is a process of obtaining a new mortgage in an effort to reduce monthly payments, lower your interest rates, take cash out of your home for large purchases, or change mortgage companies.
1. Lower Interest Rates
One of the main advantages of refinancing is reducing an interest rate. As people work hard in their careers and continue to make more money, they are able to increase their credit score. With this increase comes the ability to procure loans at lower rates, and therefore many people refinance with their mortgage companies. A lower interest rate can have a significant effect on monthly payments, potentially giving you more savings each year!
2. Adjusting the length of your mortgage
You can either increase the term of your mortgage or decrease it when you refinance. If you choose to increase the term, a longer term mortgage is applied, which may subsequently reduce the amount that you pay each month. However, this will also increase the length of time you will make mortgage payments and the total amount that you end up paying for the interest. On the other hand, shorter-term mortgages generally have lower interest rates and you pay off your loan sooner, further reducing your total interest costs. However, your monthly payments usually are higher because you are paying more each month.
3. Switching to a fixed-rate mortgage
If you have an adjustable-rate mortgage, your monthly payments will change as the interest rate changes. With this kind of mortgage, your payments could increase or decrease. You may be uncomfortable with this idea, especially when your mortgage rates may also increase. In this case, you may want to consider switching to a fixed-rate mortgage to give yourself some peace of mind by having a steady interest rate and monthly payment.