Home loan refinancing is when an existing outstanding home loan is replaced by a new home loan that will be secured by the same asset as the prior loan.
A home loan may be refinanced for many reasons. Sometimes home loan refinancing lowers the interest rate on the loan, often resulting in lower monthly mortgage payments on the home. Other times, home loans are refinanced to get extra money that can be used to pay off different outstanding debts.
Lower interest rate payments:
It is no secret that lenders prefer low risk loans and usually offer the best interest rates to people with excellent credit. Chances are you are paying a higher interest rate if you purchased your current home with bad credit. Home loan refinancing may benefit you by reducing your interest rate and allowing you to pay more on your principal. If your situation has changed and you now pay your monthly mortgage payments on time, your credit score may reflect this improvement. Thus, you might be eligible for refinancing of your home loan at a better rate.
There are other reasons to refinance your home loan that also may qualify you for a lower interest rate. If you income has recently increased and you have paid off additional debt, your debt-to-income ratio is probably lower than when you initially took out the mortgage. Home loan refinancing would likely benefit you by getting you a lower interest rate. Another situation when refinancing your home loan makes good financial sense is when you have an interest only loan (I/O) or an adjustable rate mortgage (ARM). These products often start out at low interest rates for a short period of time and then increase substantially. Hence, many homeowners refinance these types of loans for a fixed rate option.
Refinancing is convenient:
Perhaps you are wondering whether refinancing your home loan is convenient. It all depends on your particular situation. Many financial consultants consider it worth refinancing your home if the new interest rate is at least 1.5% lower than your current rate. Moreover, if you are refinancing your current home loan for a higher loan amount to pay off higher interest rate consumer debt such as credit cards, it probably makes financial sense to do it.
Locating a lender:
Many lenders offer home loan refinancing and it is your responsibility to determine which program is best for you. Research your options. There are many online sites that offer advice and allow you to compare lender offerings to find the one that best meets your needs. These types of sites can save you time by letting you get quotes from multiple lenders in one place.
When to Ask for Help:
Never hesitate to get help from an industry professional if you think that the process is too complicated for you. Make sure you understand everything about refinancing before you act. Financial consultants and mortgage advisors are willing to help explain the process for home loan refinancing and most will provide advice on how to improve your credit score and history. You can find several online websites that can help you.