When is refinancing a mortgage important for your savings

29 Sep 2020

If you can refinance your mortgage by even a half of percentage or three-quarter points, then it is worth looking into it.

So, how will you figure out if it is the right time for you to refinance?

People usually prefer to go for a 30-year mortgage loan as it reduces the monthly payments while with a 15-year mortgage the payment will be higher.

You can plan to refinance when there is a drop in the rate of interest to lower your monthly payments and save yourself cash over the life of the loan.

But before you put out your application for refinancing, consider your credit status, overall financial health, that would help you in meeting your financial goals.

When can a mortgage refinance save you money?

The first thing which you will have to ask yourself is, how much difference can a mortgage refinancing make to your monthly budget. There is no such thumb rule as to when should a refinancing be done.

If you want to save on your monthly cash outflow of installments, monitoring the market scenario is required. You can take advantage of the time when interest rates are low and it is really going to help you in saving your money.

However, you will need to qualify for the refinancing. You can do so by updating your credit score and take necessary steps if necessary. If your credit report shows improvement since you got your loan, you have chances of getting benefit from a refinance.

How does refinancing work ? - Replacing your current loan with a new one is solely done with the intention of achieving a financial goal set up for yourself? It can help you in:

•          Pay off your loan faster

•          Reduce the amount of interest over the tenure of the loan

•          Lower the monthly payment towards installment

•          Use the equity to pull out cash

Get the perfect deal possible for yourself after comparing- Even small changes in the rate of interest of your current loan can bring about significant changes that you’ll be paying off over multiple months and years.

You can apply for the refinancing of your mortgage by visiting the portal of your chosen lender. A mortgage calculator will help you get the exact figures to choose from. It will aid you in finalizing your closing costs and give you a clear picture of what it would like after refinancing your mortgage.

You’ll get a complete idea as to how much will be the savings, month on month. It might not seem to you initially but when you add up the total amount that will be saved annually, it should definitely seem to you a more obvious choice.

A lot of users are not aware of the burden that they are bearing with the extra expense of the mortgage until they actually refinance their mortgage and start saving on each month.

Let’s take an example-

30-year mortgage at an interest rate of 4.50% - Monthly Installment $1,013

15-year mortgage at an interest rate of 4.25% - Monthly Installment $1,505

The difference is coming to $492

The 15-year mortgage rate of interest is slightly lower but in spite of that, it is a good option to go by. If you consider from a longer-term perspective, that is going a save a great deal for you.  You just need to take the cost of refinancing closing costs or any other fees your lender charges-and divide them by the amount of money that you’ll be saving each month as a result of doing the refinance.

Gather all the necessary documents – When you’ll be filing the application for refinancing your mortgage, the lender will ask you about furnishing various financial documents. It will help the lender in deciding if you’re able to repay the loan on time or not.

If you hand over all the required documents, the process of refinancing is very likely to go smoothly. And if any further requirement comes up, get them at the earliest to avoid any kind of delay.

Complete a home appraisal – The lender will access the property cost and determine whether they are lending the appropriate amount. They’ll look into the current worth of the property and fund for the amount as deemed fit for the property.

Finalize the new mortgage deal – Once your application is approved in the initial phase, you should be focussed on getting it closed asap by furnishing all the relevant documents.

You’ll be required to sign all the documents and complete all the closing costs. Going ahead you will now be paying your installments to a new lender with a lowered interest rate.

Paying attention to closing costs is equally important – When planning to refinance is on your mind, you’ll have to consider the closing costs as well. Few lenders can charge a significant amount by increasing the fees and all. During advertisements, it is obvious to get attracted by the various tricks the lender applies, which sounds great. But most of the time it is hidden in the clauses which you will have to be careful about.

How does refinancing affect your credit?

Refinancing your loan has the potential to lower your credit score temporarily. The down scoring generally happens temporarily and gets resolved thereafter quickly.

Let’s have a look at the few factors that impact your credit score during refinancing:-

Hard inquiries - Lenders in order to process your loan application do a hard inquiry. This lowers the score by a handful of points, but gradually it also disappears.

Missed payments of your old loan- It is advisable that you pay all your existing dues in order to carry on your proceedings of refinancing smoothly. Otherwise, it will have an impact on your credit report.

Closed accounts and new loans – Close all the previous loans in good standing which will have a positive impact on your credit score. This will help you have a good credit report.

To Summarize – Refinancing is a great option when you’re looking save back money and lower your monthly payments.

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