Refinancing your mortgage means getting a new mortgage to replace the original one. Mortgage refinancing is mostly done by borrowers who want to obtain better interest rates, but unfortunately, this process can be risky for some of them.
If you are not sure if mortgage refinancing would be a good option for you, here are a few tips to help you make up your mind.
1. Mortgage refinancing can help you lower your monthly payments
One of the main advantages of mortgage refinancing is the possibility to obtain reduced interest rates and to be able to make lower monthly payments. If you have recently improved your credit score, you might be able to negotiate a better rate with your lender.
There is no point in trying to refinance your mortgage if you are not able to get a better deal or if you can’t really afford to pay the penalty fees for breaking your contract. Before refinancing your mortgage, make sure you will be saving money in the long run.
2. Mortgage refinancing allows you to take equity out of your home
Many borrowers turn to mortgage refinancing so they can take equity out of their home. This means that refinancing your mortgage can allow you to access a certain percentage of the value of your home.
If you need money for a new car, for home renovations, for your children’s education or for an interesting investment opportunity, refinancing your mortgage to access equity might be a good idea.
3. There are different ways you can refinance your mortgage
There is more than one way to refinance a mortgage. You can decide to break your current mortgage contract so you can get a new one. If you are interested in accessing your home’s equity, you can add a home equity line of credit.
You can also blend and extend your mortgage with your current mortgage lender, but this solution might not be to your advantage as you might end up with higher interest rates.
4. You can take this as an opportunity to shop around
When you decide that mortgage refinancing is a good option for you, you can refinance with your current lender, but you don’t have to. You can take a moment to shop around to see if you can find a better deal with another lender.
However, your current lender might be ready to offer you better rates so they won’t lose you as a customer.
5. You might have to pay heavy penalty fees
One of the risks associated with mortgage refinancing is that your lender might charge you penalty fees for breaking your contract. For example, if you have a variable rate mortgage, you might have to pay a penalty of three months of interest.
If you have a fixed rate mortgage, you will have to pay a different penalty. Don’t hesitate to ask your lender about their penalty fees for mortgage refinancing.
6. Right now might not be the best time to refinance your mortgage
If you have decided that you want to refinance your mortgage, you have to keep in mind that right now might not be the ideal time to do it. Many lenders will require borrowers to keep their current mortgage for at least one year before they can refinance it. Some circumstances might make it more risky for you to refinance at the moment.
If you are unsure, you might want to ask a mortgage broker for advice, or to use an online mortgage rates calculator to figure out if you should refinance or if you should wait.