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If you are having a tough time meeting your mortgage payments, you might have heard that you can refinance your home loan.
Refinancing is a financial move that can reduce the interest you have to pay on your loan and alter the payment schedule in your favor, but you must attempt it cautiously.
It is a chance to rewrite your story, but if you don’t know what you are doing, it may or may not have a happy ending.
With that said, let’s take a comprehensive look at the pros and cons of refinancing your home loan and some key questions to ask when signing up for a home loan.
Pros Of Refinancing Your Home
Use Your Home Equity
Your home equity is the cost of your house minus what you owe. By getting a new home loan, you can cash out on your home’s equity without taking out another loan.
Shorten Loan Life
If you get a better job or find an additional source of income, you can refinance your home loan to shorten the loan term.
You can refinance to increase your monthly installment with a reduced interest rate so you can pay your mortgage off quickly and save money that will have been paid as interest over the initial life of the loan.
Refinancing Could Significantly Lower Your Monthly Payments
Interest rates on a mortgage are not static. It often changes due to demand and supply. So, you should consider refinancing your mortgage if you notice a considerable drop in rates that will get you at least a 1% reduction on your present rate.
If you do, it translates to a reduction in the monthly installments you have to pay and helps you save some money that would otherwise have gone towards interest. You can find more information on this at loanDepot’s website.
Cons of Refinancing Your Home
Closing Costs
When you refinance your home loan, you have to pay closing costs. Closing costs are fees you pay in addition to the initial deposit when taking out a mortgage. It includes taxes, origination fees, and surveys.
The prices differ depending on the lender but are usually between 2% to 6% of the loan price.
Extended Loan Term
When reducing your monthly installments to save money, ensure you understand the long-term impact. Making smaller monthly payments means more years and more interest.
A Drop In Credit Score
Refinancing can affect your credit score in two ways. Before refinancing, the lender will assess your credit score, a procedure known as a hard inquiry.
This hard inquiry causes a dip in your credit score. Also, the fact that you closed down an old loan contact will affect it.
Questions to Ask Before Signing Up for Refinancing
Before applying for a new home loan, you should ask yourself these questions.
● What do I want to achieve by refinancing?
Make sure you get your facts straight—about refinancing, your financial stand, and what you want to accomplish by applying for it.
● Do I have enough home equity?
Without at least 20% home equity, it will be impossible to refinance without getting insurance.
● Is it worth it?
Know that refinancing comes with a 2% to 6% closing cost. Value its worth by calculating the savings you’ll make every month and how long it will take to break even.
● Do I have a good credit score?
Your credit score determines the credit available to you from lenders. To refinance your home loan, most lenders expect you to have a credit score between 600-620.
Deciding to refinance, like every profitable financial decision, comes with risks. It’s important you consult your financial advisor before making any major financial decision.