Refinancing a Mortgage - Why and When?

A mortgage will likely be the largest debt that you ever incur, being paid off for the majority of your adult life. Sometimes in life, other financial pressures will occur, which is when refinancing a mortgage can come particularly in handy.


Refinancing is basically altering the terms of your mortgage repayments to suit your needs at hand. This can be in the form of extending your term, lowering your monthly payments, and even drawing cash from your equity.


Why Should You Refinance Your House?


Loan Repayments are Putting on Too Much Pressure - Term Change


If your monthly loan repayment is putting too much financial pressure on you then you could possibly refinance your mortgage to lengthen your term, from 15 years to 30 for example. This will cut your standard mortgage repayment in half, giving you more capital to work with in day-to-day life, but it will increase your interest rates. The opposite is also true, if you’re doing very well and want to pay off your mortgage quicker, you can shorten your term, which will also reduce your interest rates.


You Need Cash


There are countless costs that come with being a homeowner and just existing, but it’s not always possible to access masses of capital at a moment’s notice. This is when you could use cash-out refinancing. This is when you take some of the money you’ve already paid towards the house (known as equity) back out in cash, and that amount is then added back onto your loan repayments.


Reasons that you might need money from a cash-out deal include:


  • Paying off other debts

  • Home improvements, renovations, and upgrades (which will increase the value over time)

  • Investments - retirement, business, personal projects.


When Should You Refinance Your Mortgage


Now you know some of the reasons for refinancing, it’s important when it’s actually appropriate to do so. Remember, you can only refinance your mortgage if you meet certain requirements, which include:


  • A Strong Credit Score of 580 or Higher: No lender will allow refinancing without this.

  • Debt to Income (DTI) Ratio Lower Than 50%: Most lenders require less than 50% of your income to be going toward debt for a refinance.

  • Financial Documents in Order: Much like applying for a mortgage in the first place, you’ll need the proper documentation for a refinance.

  • Lower Interest Rates: This isn’t necessarily a requirement, rather just good practice.

  • Home Value On the Up: If your home’s increased in value then your equity will have gone up, making a refinance more logical and beneficial.



Final Thoughts


There are plenty of good reasons to refinance a mortgage on your house, you just have to make sure that your reasoning is truly justifiable and that you’re meeting the necessary requirements. Happy homeowning!

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