Did you know there are more than 53 million mortgages in the US? Unfortunately, more than 4.3 million of the mortgages are delinquent. Delinquency occurs when homeowners are at least 30 days late on making at least one mortgage payment. Following the COVID-19 pandemic, the delinquency rate rose significantly.
If you are struggling to pay off your mortgage, you are not alone. However, you don’t have to wait until your financial situation gets out of hand.
What's in this article?
You can refinance your mortgage to make your mortgage bearable, though not everyone knows how refinancing their mortgage actually works.
Below, we go over why refinancing your mortgage adds value to your financial life.
What is a Mortgage Refinance?
A mortgage is a long-term loan, and it’s one of the biggest financial decisions you’ll ever make. You need to understand the different types of mortgages and how they help meet your financial goals.
Refinancing is when you pay off an existing loan with a new loan. Refinancing can be used to lower your monthly payments or shorten your loan term. They can also get cash out for home improvements or other things.
It is an excellent option for creating more financial breathing room. There are many ways to refinance your mortgage. Refinancing your mortgage can be the difference between paying off your home early and having to stay in it for another 30 years.
Make sure to get the best deal possible to get out of debt as fast as possible.
Ready To Take Your Next Step?
Reasons to Refinance Your Mortgage
If you think refinancing your mortgage is the same as shopping for a new mortgage, think again. Refinancing your mortgage has a lot of benefits that people often overlook. Many Americans in 2020 refinanced their home loan. Below are a few reasons why refinancing might be the best option for you.
Lower Interest Rates and Payments
Mortgage refinancing is a well-known strategy for lowering mortgage interest rates. However, many people don’t know of the best refinancing strategies.
Refinancing can lower your monthly payment by over 20% in some cases. This is done without changing your loan term or loan amount.
Your new lender might be willing to give better rates and lower monthly payments. This makes refinancing a great option for people who want to pay their mortgage faster.
Refinancing often carries a fee. If you have a high enough loan amount or equity, you can save interest rates. The sooner you refinance, the more money you can save.
If you wait too long, you will miss out on the greatest savings.
Shorten the Duration of Mortgage Repayment
The average mortgage term is nearly 30 years. Most people pay off their mortgages in a decade or less. The thought of making payments for that long can be daunting.
If you are behind on your bills, you could save thousands of dollars by reducing the length of your loan. Refinancing can save you thousands in fees and interest payments over the life of your loan.
It immediately lowers your monthly payments, giving you more monthly disposable income. If you refinance to a lower home loan rate, you could pay off 33% quicker than your original loan.
The process allows homeowners to consolidate their debts into one payment. This creates convenience in repayment.
Improve Your Credit Score
Most people don’t know that refinancing a home loan can help improve their credit score. Refinancing can get rid of debt and improve your money situation.
Homeowners can raise their credit score by having an account with a lower balance. This means less debt, which is suitable for their financial situation.
Consumers often assume credit scores to be a single number calculated by a formula. That isn’t the case. Your credit score is a weighted average of different factors.
One of them has to do with your debt-to-income ratio or DTI. Your debt-to-income ratio tells lenders how much money you owe against how much you earn. It’s calculated by dividing your total monthly debt by your gross monthly income.
If your DTI is too high, lenders will assume that you are at risk of defaulting on your loan. This can lower your credit score. Get financial help from experts to learn how refinancing boosts your credit score.
Eliminate Mortgage Insurance
For every $100,000 worth of mortgage balance, you pay $1.50 per month in mortgage insurance. This can add up to thousands of dollars over the life of your loan. You can lower your interest rate and eliminate mortgage insurance by refinancing a mortgage.
If you have an FHA loan, there are two methods to eliminate the mortgage insurance.
The first is to refinance into an FHA streamline refinance. This will eliminate mortgage insurance within 30 days of closing.
The only requirements for this option are that your loan-to-value ratio has to be 90% or less. You must have owned your home for at least 12 months.
The second option is to refinance into a conventional loan with 20% down. The benefit of this option is that you will eliminate your mortgage insurance immediately. The downside is you will have to pay private mortgage insurance.
Convert Adjustable Rate to a Fixed Rate
It is worth refinancing if you convert your adjustable-rate mortgage to a fixed-rate mortgage. Converting an adjustable-rate mortgage to a fixed-rate mortgage gives you more stability and security.
You will also realize significant savings on your monthly payments, as well as reduce the risk of foreclosure.
With interest rates at all-time lows, borrowers with adjustable-rate mortgages (ARMs) are considering refinancing their mortgages. This gets them a new loan with a fixed interest rate and the same loan balance.
Reasons to Refinance Your Mortgage Today
When you refinance your mortgage, you pick from various loan products with different features. This can save you money in the long run. However, discuss all the details and fees with your lender before committing.
Make sure you are comfortable with all aspects of the loan. There are many reasons to refinance your home loan. Analyze financial advice by your lender to determine your ideal option.
To learn more about refinancing and other mortgage options, visit our website today.