Refinancing Could Be the Best Thing for Your Wallet

Finnegan Pierson

You might have heard it on TV or from a neighbor, but you're not sure if it's right for you. That's right, we mean a refinanced mortgage. It can seem like a complicated process from the outside, which often leaves people wondering, "Is it worth it?" 

The short answer is yes! The decision to refinance can help you take advantage of better interest rates and ultimately reduce the total amount you pay toward your home. This isn't the only reason a financial professional might suggest this strategy to you, though. In this article, we'll dive into a few of the benefits of this approach.

What Does it Mean to Refinance?

Mortgage refinancing is a tactic homeowners use to save money. You might opt to refinance to secure a lower interest rate on your loan or change your loan term or type. Whatever the reason, the goal is to save some money. 

Basically, what you do is switch out your existing loan for a new one. You'll transfer over the debt to the new loan contract that has more favorable terms. It's not something you can do on your own, so be sure to consult with your mortgage lender or bank about your options and how to get started.

Benefits of a Refinanced Mortgage

As we mentioned, there are a number of different benefits that come when you refinance. In addition to lowering your interest rate you can also:

• Pay off debt quicker. If you consolidate to a shorter loan term, then you'll be done paying off your home in no time. This means you'll build equity faster and clear your debt sooner. The only drawback to this approach is that your monthly note will be a little higher than with longer-term loans.
• Consolidate a home equity line of credit (HELOC). You can do this by converting an adjustable-rate mortgage (ARM) into a fixed-rate loan. This allows you to put your home equity credit line into that primary mortgage loan and pay on everything at once.
• Reduce principal payments. When your HELOC is coming to the end of its interest-only repayment period, you'll have to start paying on the principal. Although this is a good sign for whittling down debt, it can mean higher monthly payments. A smart refinance decision can help you keep your monthly note within a range you can afford.

How to Refinance Your Mortgage

If you're ready to refinance your mortgage, there are a few steps you'll need to work through before you sign any papers. It's wise to do a bit of planning, which is why this process starts with setting a goal.

1. Establish a goal for your mortgage, such as saving money, shortening the term or reducing the interest.
2. Check your credit score to ensure you qualify for the type of loan or refinance you want.
3. Shop around with multiple lenders so you can compare rates.
4. Select the lender you want to work with and lock in your rate.
5. Prep for the closing procedures and costs.
6. Attend closing and refinance your mortgage!

Although there aren't dozens of steps to the process, it's important to remember these can each take some time. You're unlikely to find the right path for you on the first try, so don't worry if you spend a month or more deciding how to refinance your mortgage. What's important is that you choose the best path for you and your finances.

Drawbacks

There are lots of benefits when you refinance a mortgage, but there's also one drawback you should watch out for. If you refinance at the wrong time or with the wrong loan, you might actually end up paying more each month. Most financial professionals advise you to only refinance when you can get a lower interest rate or shorten your loan term. If you stick with that advice, you'll be all set to reap the benefits of your new mortgage loan!