Choosing the right time to refinance can be difficult. After making the purchase, you will spend years paying the mortgage on your home to build equity but sometimes it can be a good decision to refinance the home with a new loan. There are pros and cons to refinancing and choosing the right time to refinance could save you thousands of dollars in the future.
Reasons To Refinance
There are good reasons for refinancing your home at the right time in your life. The payments that made on the mortgage loan create equity in the home and the equity can be removed to pay for other expenses. A common reason for refinancing is to send a child to college or pay tuition for continuing education. Another reason usually cited for refinancing is to lower monthly mortgage payments by refinancing a lower amount or qualifying for a lower interest rate.
Refinancing a home to take advantage of a lower interest rate can save the homeowner a great deal of money over time. If the homeowner’s credit was blemished when they took out the original mortgage loan, they may be able to qualify for a lower interest rate now if they have been able to raise their credit score. People with excellent credit scores try to refinance mortgages to take advantage of low interest rates if they obtained their original mortgage loan when interest rates were high.
Refinancing Products
Homeowners usually choose one of two main types of mortgage products when refinancing a mortgage loan. Cash-out refinancing allows the homeowner to take equity out of the home in the form of cash while financing the cash amount and balance of the original mortgage with a new mortgage loan. Rate and term refinancing is taking out a new loan at a lower interest rate to pay off the old mortgage.
Consequences
Individuals looking to refinance should be aware of the consequences of refinancing as well. Obtaining money from the equity in a home using cash-out refinancing can result in the homeowner having to pay for a longer period of time to pay off the home. Attempting to pay off the home within the original time period could raise the monthly mortgage payments to an unmanageable amount, putting the homeowner at risk of foreclosure if they get behind on the payments. The refinancing decision will depend on several different things, but careful consideration will help you determine the right time to refinance your home.