The most common reason for performing home mortgage refinance is to take advantage of a more favorable rate of interest. This is closely followed by secured debt consolidation, reducing monthly repayments, greater payment certainty and the release of equity. In practice, there is normally a combination of reasons for refinancing a home loan. Prior to trawling the market for the lowest mortgage rate refinance offers, there are other vital considerations.
Uncertain Future Plans and Home Mortgage Refinance
The decision to refinance a mortgage may appear to be logical, but it’s important to have an appreciation of future plans before signing-up. Will an upcoming promotion involve relocation? Is a close family member, who lives in a different state, likely to need help and support? Nobody can accurately predict what the future holds, but it is possible to avoid some of the more common pitfalls. Redeeming a loan prematurely will offset the savings realised from refinancing a home mortgage.
Refinance a Mortgage to Consolidate Debt
A lot of homeowners refinance partially or fully to consolidate debt. Rather than paying back lots of small debts to different creditors, it seems logical to put all debt obligations under one roof and make a single, affordable repayment at month end. Although a secured debt consolidation loan reduces the amount of disposable income that goes towards servicing debt, there are potential pitfalls.
Despite the lower rate of interest and monthly repayments, extending the repayment term means that the cumulative interest paid over the life of the loan will be a considerably higher. Turning unsecured into secured debt also gives lenders greater collection powers in the event of default. Not keeping up with the repayments could lead to mortgage repossession and the loss of the family home.
Home Mortgage Refinance Requires a Good Credit Score
Refinancing a home mortgage is relatively easy, but securing the lowest rate of interest requires a good to excellent credit rating. Amy Fontinelle of Investopedia stated: “Many lenders will want you to have a high credit score and ask you to provide full documentation of your financial situation, such as recent pay stubs, bank account statements, tax returns and more.”
The lower the applicant’s credit score, the more expensive it will be to refinance a mortgage. Although bad credit refinancing is available, the rate of interest will be a lot higher. There may also be additional charges as well. Rather than performing mortgage refinance with bad credit, it’s better fix bad credit problems first. Poor credit, such as defaults and delinquencies, will show on a personal credit report for up to 7 years.
Pros and Cons of Home Mortgage Refinance
As well as improving affordability, the lowest mortgage rate refinance can help to reduce the total amount of interest that is paid over the life of the loan. However, consolidating debt, especially if that debt is unsecured, is rarely a prudent strategy because it usually has the opposite effect. Don’t just look at the rate of interest, scrutinize the charges as they are likely to erode any potential savings.