The Mortgage Refinancing Process Can Offer Financial Flexibility
It is always nice to own a home and have a little equity built up in the process. It is a true sign of homeownership. A person in that position should be very proud of what they have accomplished. Many people believe that homeownership is a big part of the American dream. The question is, "are there any other benefits to being in such a position other than having something of value?"
The short answer to that question is YES, there are several really solid benefits. One of those benefits is having financial flexibility in terms of being able to come up with extra cash when necessary. In the sections below, the information is going to focus on reasons why a mortgage refinance offers flexibility.
What is Mortgage Refinancing?
When refinancing a mortgage, the homeowner/borrower is attempting to pay off the remaining balance on their existing mortgage with the proceeds from a new mortgage. When a lender approves a refinance deal, they are agreeing to pay off the former lender (principal balance + interest due), take out closing costs, and send any remaining proceeds to the homeowner/borrower.
Reasons to Try Mortgage Refinancing
All financial decisions an individual makes should be made if and only if there are benefits to making it. While the decision to refinance a mortgage is a personal one for each homeowner/borrower, there are a few benefits that serve as general reasons for refinancing. Here are five of the most common reasons.
- Take Advantage of Lower Interest Rates - When borrowing money for any reason or purpose, the cost of borrowing should always be the borrower's top concern. The actual cost is the interest they will have to pay for the right to borrow. Given the fact a mortgage is almost always the largest loan a person will owe, the interest rate attached to their mortgage will require the payment of a lot of interest over the life of the loan. If a homeowner/borrower can save money with a lower interest rate, it makes sense to refinance.
- Change Loan Type - Sometimes, people will turn to an "adjustable-rate mortgage (ARM)" in order to meet certain financial goals. As the interest rate on an ARM loan escalates, they might come to a point when the required monthly payment amount becomes a financial burden. At that point, people will often refinance into a fixed-rate mortgage to secure better terms.
- Adjust Loan Due Date - It is very common for homeowners/borrowers to intermittently reassess their financial position in life. If they can pay off their mortgage early or need more time to repay their mortgage, refinancing is a solid option for changing a mortgage payoff date.
- Change Lenders - For a variety of reasons, a homeowner/borrower might find themselves at odds with their mortgage lender. When this happens, having loyalty to a particular lender makes little to no sense. The fact is there are hundreds of mortgage companies out in the marketplace, competing for business. If someone wants to change lenders for any reason, they have a right to do so.
- Create Cash Resources - When it comes time to make another investment, pay for college, or cover a financial emergency, home equity is always a viable way to create a cash resource. By refinancing, the old loan gets repaid, and any remaining proceeds will go to the borrower.
Commonly Misunderstood Parts of Mortgage Refinancing
In the eyes of some people, financing a mortgage is never a good idea. They tend to believe this because they have misconceptions about the refinancing process. Here is a look at a few common misconceptions.
- “It is too much of a hassle to refinance” - If a borrower has equity in their home, the process is very simple.
- “I can't qualify” - With access to hundreds of available lenders and dozens of different loan programs, there is something out there for anyone with a reasonable credit score or equity.
- “Should wait for rates to drops” - Rates might not drop, but there are other reasons why refinancing a mortgage makes sense.