Let’s face it, the word “mortgage” doesn’t exactly scream excitement. But wouldn’t you want to know a way how to can potentially save money on your mortgage? Well, the answer to your question just might be mortgage refinancing. Not only can refinancing your mortgage help you reduce your monthly payments, but it can also reveal an opportunity to explore better loan terms and access to the equity of your home.
However, before you get a jumpstart into the process of refinancing, you should first thoroughly understand the factors that can influence your refinance rates. Let’s step into the world of refinancing and explore everything you need to know to get started refinancing your mortgage!
Refinancing a Mortgage
What is the purpose of refinancing a home, and how does refinancing work? When you refinance your mortgage, you are effectively paying off your house loan with another loan with different terms. This is done to take advantage of the benefits provided within the terms of your new loan and to be given access to the equity of your home.
If you’re experiencing difficulty financing your current mortgage, then refinancing could offer more avenues to paying off your mortgage’s balance.
Your new loan will come with new terms, requirements, and fees, and you should take the time to understand the new conditions of your refinanced mortgage so that you can make an informed decision about your mortgage to ensure that you’re getting the best possible deal.
Benefits of Refinancing
When refinancing your mortgage, you can experience improvements in numerous aspects of your financial obligations. These improvements can impact your loan’s monthly payment, term, and interest rates, further enhancing your ability to save money.
1. Reduced Interest Rates
Securing a lower interest rate is one benefit you can acquire through refinancing your mortgage. If interest rates have reduced since the establishment of your initial mortgage, refinancing can allow you to capitalize on these lower rates and save money over the life of your loan.
Moreover, a lower interest rate can greatly reduce the total amount of interest you pay over the entirety of your loan. Over time, this has the potential to save you thousands of dollars.
2. Lower Monthly Payments
Lower interest rates can consequently lead to lower monthly payments, which can provide you with more capital in your pockets for other expenses or savings. This can provide you with an increased amount of financial flexibility, which can be useful in times of economic or financial hardship.
Having lower monthly payments will help you efficiently manage your budget and reduce the stresses associated with finances. With this, reduced payments will allow you to focus on other important financial goals, such as paying off other debts or making other financial investments. You can even return the extra money to the principal of your refinanced mortgage to contribute to a faster refinance duration.
3. Shorter Term
Refinancing a home can also offer you a shorter loan term. If you’re successful in obtaining a lower interest rate, you can pay off your mortgage quicker and save money on interest over time by opting for a shorter loan term. Your monthly payments may be increased as a result, but the significant long-term benefits and savings would be worth it in the end.
For instance, let’s say that you currently have a 20-year mortgage. If you refinance it into a 10-year mortgage, you’ll end up paying it off in half the time and save thousands of dollars in interest payments. You’ll also be provided with a sense of financial security with the thought that your mortgage will be paid off in a fraction of the time.
4. More Savings in the End
By securing a shorter loan term and a lower interest rate through refinancing, you can accumulate thousands of dollars in savings throughout the duration of your loan. These savings can be put towards other meaningful areas of your life or used to pay off your mortgage more quickly.
Having this extra cash flow will give you the financial security you need for repurposing your funds on other important aspects of your life, such as retirement or paying off other loans.
Factors That Influence Refinance Rates
Certain factors exist that are used in determining the value of the rates associated with refinancing a home. These aspects you should consider are related to your current level of credit, housing market conditions, the duration of your loan, and the loan amount.
1. Credit Score
Your credit score can play a large role in the evaluation of your refinance rates. Lenders utilize credit scores as a means to assess your financial trustworthiness and decide the risk of providing monetary assistance to you. As such, with a higher credit score, you’d be more likely to receive a lower interest rate when refinancing your mortgage.
A good credit score can display to lenders that you are responsible with your debts and will be more likely to make on-time payments. As a result, good credit can make you a more attractive credit borrower and potentially qualify you for reduced interest rates.
Conversely, a low credit score may indicate to lenders that you may have difficulty paying off your debts, therefore categorizing you as a riskier borrower. This can ultimately lead to increased interest rates or difficulty getting a loan.
2. Housing Market
A fluctuating housing market can have a direct relationship with the rates of refinancing your home. When market conditions are weak and there is a low demand for homes, this may shift refinance rates in your favor. In contrast, if the demand for homes is high due to strengthened housing market conditions, you may have a more difficult time getting a good deal on refinance rates.
3. Duration of Loan
As touched upon above, a loan with a longer duration may end up causing you to have a higher rate of refinancing, as opposed to a loan with a shorter period. If you can, aim at paying off your loan in the soonest amount of time to avoid wasting money on interest rates.
4. Loan Amount
The amount of your loan also typically influences the rates you will be paying. A larger loan may make you appear to lenders as a risky borrower. Lenders will then increase the refinance rates in the fear that you could potentially default on the loan.
The Bottom Line
As a homeowner, you’ve likely wondered “how does refinancing work” throughout your journey. Refinancing a mortgage allows you to effectively accept more favorable loan terms to pay off your current mortgage.
It seems like a lucrative option, but is it smart to refinance? Often, yes, but it depends on your situation and goals. If you already have low credit, refinancing may not be a good option for you such that interest rates will likely be high and you can potentially further lower your credit score by having a refinancing agency pull your score.
If you already have decent credit and are looking for an option to pay off your mortgage sooner while lowering your interest, then refinancing may be the right option for you. As with any monetary decision, it’s important to weigh your choices, and the pros and cons of each, carefully so that you do not end up in greater financial turmoil.
Get low interest rates on your loans with Cedar Home Loans!
Looking for an affordable and easy way to refinance your mortgage? Cedar Home Loans has the solution for you! We offer some of the best refinance rates in Colorado and are committed to assisting you with all of your lending needs.