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Refinancing a mortgage means paying an existing loan and replacing it with a new one. If you have deep debt or having trouble paying for an existing loan, it is best to get a refinance mortgage. There are a lot of reasons why homeowners refinance, such as:
- To get a lower interest rate
- To shorten the term of the mortgage
- To convert from an adjustable mortgage rate to a fixed mortgage rate
- To tap into home equity, raising funds deals with:
- financial emergency
- finance a large purchase
- consolidate debt
Refinancing costs between a percentage of 3 and 6 of the loan’s principal requires:
- appraisal
- title search
- application fees
A homeowner needs to decide whether refinancing is a wise economic decision.
Refinancing to secure lower interest rate
Refinance lower interest rate is one the best reasons for the existing loan. The rule of thumb is refinancing is a good idea if you reduce the interest rate by at least 2%. But, many lenders have said 1% savings is enough incentive to refinance. Using a mortgage calculator will be a good source for budgeting some costs.
Calculate monthly payment
Monthly mortgage payment depends on the following:
- home price
- down payment
- loan term
- property taxes
- homeowners insurance
- the interest rate on the loan
Use the inputs below to get a sense of what the monthly mortgage payment ends up being.
Shorten the loan’s term through refinancing
When the interest rates fall, the homeowners can refinance an existing loan for one more loan without changing the monthly payment, which is significant in a shorter term. For 30 30-year fixed-rate mortgages on a home loan, refinancing from 9-5.5% cut the term in half up to 15 years with a slight change in monthly payment. But, if you are at 5.5% for 30 years, getting a 3.5% mortgage for 15 years raises payment.
Refinancing is a great financial move if reducing mortgage payments. It shortens the term of the loan or helps build equity more quickly. When used carefully, it is a valuable tool to bring debt under control. Before refinancing, look at the financial situation and ask about it.
Does refinancing affect the credit?
Refinancing a mortgage has some impact on the credit, but usually minimal. It occurs for multiple reasons:
Mortgage lenders are conducting credit checks. The purpose is to see if you qualify for refinancing, and whether it appears on your credit report. Single inquiry shaves up to 5 points of the score. When planning to apply for the other types of debt, such as:
- car loan
- credit card
When you refinance, you close one loan and open another, which has a lower interest rate than the old one.
