If most of your money is invested in your home, as is the case for many, there may come a time when you need access to that money. That means your mortgage needs to change too. You might require a change to your payment plan, access to more money or want to lower your borrowing costs. If so, it might be time to refinance your mortgage. But what exactly does that entail?
You are creating a new mortgage. When you refinance your mortgage, you will have different terms from your original mortgage, and possibly a different interest rate. If interest rates are down when you refinance, you can benefit with lower payments. This kind of benefit is often what draws people to refinancing; however, make sure to speak with an expert as penalties for breaking your original mortgage might outweigh any savings you could gain from the refinanced payments.
Consider a home equity line of credit. This option is often used when extra money is needed for renovations or other unexpected life events. It works similarly to a regular line of credit, but the lender will use your home as collateral for your loan, to ensure that you pay back the money borrowed. The amount available for a home equity line of credit depends on the amount still owing on your mortgage, so this option is often better when more of your mortgage is paid off.
You‘ll need a fresh credit check. Just as they did when you applied for your original mortgage, you will need to have your credit checked again when refinancing. Creditors are always weary of someone’s financial situation when they need to refinance, so they will need to look at your current financial situation. If you have a high credit score, you’ll have no issue refinancing. If you’re in debt, or have a low credit rating, try to improve it before attempting to refinance your mortgage.
Make sure refinancing is right for you. Finally, it’s important to be sure that refinancing is your best option. Lower interest rates may be tempting, but would it be worth it to incur the penalties that come with breaking your current mortgage? Would it be possible to save money instead of applying for a home equity line of credit? These are all important questions to ask yourself before refinancing.