Is it Bad to Refinance?
Having a mortgage with a high interest rate or other undesirable terms may require you to look for a new loan. Perhaps you would like to withdraw cash from your home's equity. Regardless of the reason, you can refinance by obtaining a new mortgage to pay off your existing one. You can apply for a loan from your current lender or find a different company to refinance your mortgage.
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Process
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Applying for a loan to refinance your existing mortgage requires a process similar to the one you completed for your first loan. Before you find a lender, check your credit history for free at AnnualCreditReport.com. Make sure that there is nothing on the report that will prevent you from obtaining a loan with the best interest rate and terms. Approach your current lender first. Your paperwork on file may serve to save you time and money. Otherwise, shop around for a new loan. Complete the application packet, which will ask for income tax records and all documents supporting your income. Your house will be appraised and the value will determine if you are able to be approved for a new mortgage. Ideally, your loan amount should be no more than 80 percent of the value of your home.
Advantages
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Refinancing your home loan may be a good idea. If you are facing foreclosure, you may be able to keep your home with more affordable payments. Also, improving your terms, such as changing from an adjustable to a fixed interest rate, is an advantage to you. If your home's value is high enough to take cash out of the equity through a refinance, doing so may help you consolidate high-interest debts into one payment that saves you money. Alternatively, you may not have a choice because your current loan had a short term and is now becoming due.
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Disadvantages
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Refinancing may be bad for you if the expense to do so is not worth the savings. Many of the same closing costs are involved in a refinance as in your original loan. Costs that may outweigh the benefit of a new loan are discount points, origination fees, an appraisal, title search and title insurance. Another disadvantage is, if you are taking cash out of your equity, you may not spend it wisely and end up with a larger payment for your mortgage. Also, if it takes you longer to pay off your new loan than your old one, you will be spending more money over the life of your loan.
Considerations
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To save on some of the expenses involved in refinancing, ask your current lender to reissue your title insurance, if it is refinancing your loan. This may save you 40 to 70 percent on a new policy. Also, ask for a preliminary computerized appraisal so that you don't have to pay for a formal one. If you want to lower your payments, consider refinancing only if your new interest rate will save you money in a reasonable amount of time after adding up the closing costs. If you plan to move before you pay off the costs of the new loan, you will lose money instead of saving it.
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