Refinancing your mortgage is often a wise move for homeowners. In fact, homeowners can refinance a mortgage multiple times over the life of the loan. There is no predetermined limit to how often you can refinance. However, refinancing does impact your credit score and will likely cause a decrease in it if you repeatedly refinance.
What is refinancing?
Refinancing a home is just like buying it again. Essentially a new lender will pay off your old mortgage and give you a new one for the same property. Usually the new one offers financial benefits that have enticed you to make the change.
While the negotiation with a seller does not occur during a refinance, the dealing with lenders is as it was with your initial mortgage. Your credit will be checked. You will need to produce documentation of your income and expenses. You will be re-qualifying for a mortgage all over again and you can even cause your credit score to decrease if you do not qualify for the loan.
With mortgage refinancing, many of the associated fees are the same as when you originally bought your home. These fees are called closing costs and include things like title charges, taxes depending on where you live, origination fees, appraisal fees and recording fees.
What are some reasons to refinance?
Homeowners look to refinance for a variety of reasons. Many of them want to lower the interest rate that they are paying on their mortgage, in order to lower the monthly payment or decrease the length of the mortgage or even both. Many mortgages were originated when interest rates were higher than they are now, therefore there any many people who are simply paying more than they need to on their mortgage.
Many homeowners seek to refinance their home in order to access the equity once their home has some. Home equity refinancing is very common, but is often not a wise financial decision. If you are considering taking equity out of your home, be sure you are doing it for a very good reason, because you will be stuck with the consequences of the decision for years to come. Financing a vacation, starting an ill-conceived business, or purchasing recreational vehicles are amongst many of the poor reasons to take equity out of your house.
How do lenders differ when it comes to refinancing?
Just as in when you are looking for an initial mortgage, there are many companies out there competing for your business when it comes to refinancing. However, each differs slightly with the guidelines they put in place for borrowers. Some insist that homeowners wait at least a year before refinancing. Others may require you to have a certain percentage of equity in the home.
Mortgage lenders make money from the closing costs from refinancing your loan. For this reason, many of them are eager to help you if you want to refinance your mortgage, even if you have done it before. As long as you are eligible to refinance, they will help you even offering suggestions that may not be in your best interest long term, such as extending the length of your mortgage.
What should you consider when refinancing?
It is important to consider what benefits you will receive because of refinancing your mortgage. While refinancing in order to save on interest is wise, there are closing costs and other fees associated with each refinance. Therefore, it is important to be sure that you will save money and stick with the refinance long enough to make it worth your while.
Consider also any penalty fees that your existing mortgage lender may have for early payoff. While not all companies have such fees, some do. So it is necessary to check it out before taking the steps to refinance. If such fees exist, be sure to count the cost when determining if the refinance is worth it. Be sure to look for a new mortgage with no such fees.
If you have bad credit because of a bankruptcy or other serious financial problem, you may want to forego considering a refinance until you rebuild your credit. These factors will affect the rate you are offered and whether you will even be eligible to refinance.
If you opt to refinance, look at maintaining your present payment amounts if you can afford it. By doing so, you will pay off your mortgage earlier and save yourself even more money. One of the worst things you can do for yourself financially is to refinance your home and add extra years to the duration of the mortgage in order to get a smaller monthly payment. In the long run, it means you will pay the lender a lot more money in interest and you may even extend your mortgage into your retirement years when your income potential will be more fixed.
Take the time to carefully analyze the financial aspect of refinancing. If you save $100 per month, how many months will it take before the closing costs of the refinance are paid off? You should never do another refinance until the previous one has at least started to save you money. You should also not refinance unless you are confident that you will remain living in that house long enough to see the benefits.
While you can refinance as often as is practical, there are many things to consider. Taking the time to do your homework can ensure that you make a wise decision when it comes to refinancing!