Current mortgage rates mean that refinancing your existing home loan can either allow you to consolidate debt, pull out cash or improve your house. If the pandemic taught you that you really need more space in your house, an office, or a workout room, then tapping into your current equity can make it much easier to enjoy more house without the hassle of moving. If you're headed into retirement or want to cut back to just one income, a refinance of the existing mortgage for longer terms can lower your payment. For many families, the pandemic and financial challenges that followed meant that older children have moved back in to stay, so adding an apartment or second access may be necessary for the comfort and privacy of all. Finally, if you're struggling with debt, refinancing your current mortgage could allow you to reduce the amount of interest you're paying on your monthly bills.
Benefits of Refinancing
While a refinance isn't really a method of debt reduction as you're fundamentally moving debt, getting rid of as much unsecured debt as possible will lower the interest you have to pay and make it easier to improve your credit score. If you choose to refinance your home to pay off credit card debt, make sure that you
- Determine the source of the problem: Why were the cards used?
- Avoid rebuilding this debt: What will you do with the cards once you pay them off?
- Move forward toward a place where you don't have to rely on carrying a balance: How will you spend smarter?
There are many who pay off credit card debt with a cash-out on their mortgage only to charge up the cards again. Another option is to cut up the cards and cancel the accounts, but this only works if you don't mind the hit to your credit rating. Both of these are a waste of your refinancing efforts. Canceling accounts after paying them off lowers your total credit available, which can lower your credit rating for a time. Additionally, canceling your credit cards means that you will suddenly get new offers, which can be hard to resist.
Before you go through the work of a mortgage refinance, get serious about building a working budget. Keep it simple to start; just track what you spend and keep receipts in a small notebook. At the end of the month, review the receipts and put a + mark in front of the spends that worked. Put a - mark beside the expenses you regret. Next month, go for more + marks.
The Mortgage Refinancing Process
You will need to get together all of the information for your refinance that you did for the first mortgage. If you are refinancing with the same bank, you may be able to simply update paycheck and tax return information.
Make sure that you check your credit rating before you start the process. Review the document for any errors, particularly on student loans or if you've co-signed for anyone.
You may need to make some changes in your bill-paying process before you can apply for your new mortgage. Make sure that you're paying everything on time or early to avoid dings on your credit. Don't apply for new accounts, but don't close any either.
Your home may need to be inspected. If you're planning an addition or renovation with the cash-out payoff, get together the estimates you've gotten from contractors so you can demonstrate
- What changes you will make
- How they will improve the value of your home
You need to demonstrate to the lender that you will be able to pay off the debt. Lenders learned in 2008 that they really don't want to own your home. You also need to demonstrate that your improvements will not lead to an over-customized property that will be impossible to sell.