Mortgage rates hit a historic low last year, but now we see them creeping up again. This has many homeowners thinking about refinancing before rates get any higher, and it’s not a bad idea. Refinancing is a great way to save yourself some money each month, and it has its other advantages too. Different types of refinancing can be used as tools to help you to meet your financial goals.
Lowering Your Interest Rate
The most common type of refinancing is used to change the terms of your current mortgage in order to lower the interest rate, extend the repayment period, or both. This type of refinancing pays off your current mortgage and reissues an entirely new mortgage, with new terms and a fresh start on repayment. It’s nice to see your monthly payment go down, but this may increase the amount you pay in the long run, depending on how long you’ve already been paying on your current mortgage, and how much your interest rate goes down.
Cashing Out Equity
Another popular reason to refinance is to take some cash off the top of your new mortgage that can be used to remodel or make home repairs, to pay off debt, to buy a second property, or to accomplish other financial goals. This type of refinancing replaces your current mortgage with a new one that covers the principal and equity in your home, leaving the equity available to you in cash. This puts you back to square one on paying off your home but can be a real lifesaver when you need the money. Often times, there is the added bonus of your new mortgage having a lower interest rate, which may keep your monthly payment the same or even lower it.
Keeping Your Home
If you’ve fallen behind on your monthly mortgage payments, refinancing may be a way to avoid a short sale or foreclosure. This type of refinancing washes your delinquent mortgage clean by replacing it with a fresh, new mortgage. This saves you from having to make up any late payments and allows you to start clean. Sometimes the new mortgage is offered with a reduced balance so the homeowner will no longer be upside down in their mortgage. This type of refinancing is offered in response to the housing crisis. Lenders don’t offer it in very many cases, but it doesn’t hurt to ask when it’s your last option.