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Are you dissatisfied with your current mortgage? If so, refinancing might be the solution. Obtaining a new mortgage to replace your existing one is called refinancing, and it can improve your financial situation in several ways.

Perhaps you’d like to replace your variable rate mortgage with a more stable fixed-rate loan. Or maybe you need to lower your monthly payments to create more room in your budget. Whatever the reason, refinancing could help.

 

What is Refinancing?

Simply put, refinancing is the process of replacing your original home loan. It allows a borrower to improve their mortgage by changing the term or rate or both. During the refinance, the first loan is paid off, and a second loan is created.

Through this process, borrowers can reduce monthly payments, lower the interest rate, change lenders or even take cash out of the home. A cash-out refinance can provide the funding you need for home improvements, education costs or other large purchases.

Most homeowners refinance when they have equity in their home (equity is the difference between the worth of the house and the amount owed to the lender). If you’ve never refinanced a mortgage before, what kinds of issues do you need to worry about?

 

Tips for Refinancing Your Home

Before you decide to refinance, think about the following issues:

• Timing: Refinancing at the right time may help you to increase your equity and take advantage of historically low interest rates.
• Loan Costs: While a strategic refinance may help you to save many thousands of dollars over the life of the loan, you must consider the costs associated with obtaining the new loan.
• Shopping Around: Some people start with their current mortgage lender as they embark on a refinance. This may be an excellent place to begin, but don’t stop there. By shopping around (or having a broker shop around for you), you can tap into today’s most competitive loan terms.

 

How Does Refinancing Work?

The first step to a successful refinance is to make sure you understand the current terms of your loan. It isn’t easy to shop around for better conditions before you know what you’ve got. The next step is to evaluate and compare home loan products to decide if you can find a better deal than your current loan. 

We can help you to know if a refinance will help you to achieve your personal financial goals. Additionally, we can shop around for you, seeking a lending product that meets your specific needs.

The application process comes next. You’ll need to gather documents and schedule a time for an appraisal. Once approved, your new mortgage provider will contact your current lender and make arrangements for closing the loan. On settlement day, you cease paying the mortgage to your old provider and start remitting payments to the new lender.

 

What are the Risks of Refinancing?

As with other types of financial decisions, refinancing comes with some risks. 

Lost Value

Not all homes increase in value, and if your home hasn’t, you may not have enough equity to justify the refinance.

Not Understanding the New Terms

A new home loan typically comes with dozens of pages of legal documents. If you don’t understand all of the terms, you might end up with a loan that doesn’t meet your needs. For instance, some loans include prepayment penalties, which could interfere with plans to pay off your mortgage early.

Losing the Big Picture

Whenever you consider making a big financial move, it’s helpful to step back and consider the big picture. What are your long-term goals? Will a refinance help you to achieve them?

If paying off your mortgage helps you to achieve your goals, a refinance may be in order, especially if your current loan has a high interest rate. On the other hand, the loan costs might negate the positive impact of a lower rate. In other words, you might be able to achieve your goals sooner by paying off your principal (if the loan allows prepayments).

 

Talk it Over with Your Adviser

An outside opinion can be incredibly helpful as you evaluate whether or not to refinance your home mortgage. By understanding the basics of refinancing, you can make a well-informed decision and take another step toward financial freedom.

Reach out to us at Altus to learn more about refinancing or to talk over your long-term plans with one of our expert advisers. We’re here to help!