If your idea is to save money by refinancing, to lower your monthly payments by getting a longer term or get extra cash for other purposes by requesting a cash out refinance loan, there are different facts that you should know and different variables that you should watch closely.
Saving money by refinancing
If you want to save thousands of dollars of interests with a refinance home loan, you need to make sure that the new mortgage comes with a lower interest rate. You’ll also have to check that there are no extra fees or costs that you’ll be charged like closing costs or administrative fees that may turn your new loan more onerous. Moreover, make sure that the previous loan doesn’t have a prepayment penalty fee and if it does, you need to ponder this too when calculating if your new loan will save you money or not.
There are basically three reasons why you could get a lower interest rate: An improvement on your credit score since the last home loan application, a reduction on average interest rates on home loans due to an improvement in market conditions and a shorter repayment term on the new loan. Thus, these three factors need to be taken into account in order to see whether you’ll be able to save money or not by refinancing. If you have or can improve your credit score you’ll be able to get a lower rate and save money. Waiting for proper market conditions to refinance is also a smart thing to do. And finally, shortening your repayment program as long as you can pay the monthly installments is another way of saving money.
Reducing your monthly payments
Reducing your monthly payments can be achieved by refinancing for a lower interest mortgage loan. However, chances are that if you need to reduce your monthly payments, you won’t be able to get a lower interest rate. Moreover, one of the most effective ways of reducing the interest rate (shortening the loan term), would backfire because it would increase your monthly payments. Thus, you’ll have to do exactly the opposite thing. In order to get lower monthly payments you’ll have to get a mortgage loan with a longer repayment program. This won’t save you money, but will definitely reduce the amount of money you’ll need to pay on each mortgage installment.
Getting extra cash from your refinance mortgage loan
Getting extra money from your refinance home loan can be easily achieved by requesting a cash-out refinance home loan. However, in order to get the amount of money you need and want, you have to possess enough equity on your home. Equity is the difference between your home’s value and the outstanding debt secured by it. Thus, if your property is worth $50.000 and your outstanding mortgage debt is $45.000 you will only be able to get $5.000 if there are no other additional costs. That being said, for this kind of refinance loan, what you need to watch closely is not only your credit score and the loan terms but also your home equity before deciding whether to apply or not.