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2 Signs That You Should Refinance Your Home Loan

January 29, 2021 Financial No Comments

Home loans are a complicated tangle of information. It can often be difficult to navigate home loan refinancing procedures because the paperwork alone for a mortgage application can stack up sky high. But understanding your refinancing options is a crucial part of homeownership that you must be able to pilot in order to keep your family’s finances on track.

1. Home Renovations

One great reason to consider a refinance home loan is that you are eyeing up some costly home renovation projects that will transform your house into the perfect home you’ve always wanted. A new home loan often requires a new series of paperwork, a hard credit check, and new loan terms that may or may not favor you as the borrower. But a refinance loan is a different sort of borrowing.

Essentially with this type of lending, you can take equity out of your home or borrow the exact amount still outstanding on your current mortgage. You make monthly payments on the principal of your mortgage loan on a regular basis, and as such, are building up equity, or a continually growing “ownership stake” in your home. As a mortgaged borrower, the bank you borrowed from technically owns the home you live in while you continue to pay on the home loan. But as time goes on you grow your equity in the property and the bank’s ownership is diminished.

Because of this changing relationship, many homeowners have the ability to refinance their home and take out a larger loan in order to defray the upfront costs of a large scale project like a swimming pool design and construction, or a total kitchen remodel. Your home is likely your greatest asset and creating new, customized spaces within the structure only add to the property’s value. Strategic home renovations therefore not only make your property more attuned to your family’s needs but also increases its resale value if it comes time to move on to a new home.

2. Utilize a refinanced home loan to take advantage of low rates.

Another reason to refinance your mortgage is during a banking downturn in interest rates. The current borrowing climate in 2020 is one such example. When interest rates bottom out, borrowers find themselves in a fantastic position to refinance their loans and take advantage of lower rates. During these times, it’s important to size up your options. Home loans come in two distinct flavors: fixed and variable rate mortgages.

A fixed-rate mortgage does exactly what is says. With this type of loan, you lock in a rate, and typically one lower than the current variable rate offer. This is the rate you will continue to pay over the life of the loan. A fixed-rate lock-in during a lower market is a great asset. However, the alternative option may create even better savings.

A variable-rate can fluctuate depending on market conditions. If the lending landscape continues to track downward, your rate will continue to decrease. Alternatively, if the market sees a resurgence during the life of the loan you will end up paying higher rates. A variable-rate comes with a unique gamble, but with refinancing options available to you as a borrower with a highly manicured credit score and great repayment history, you can simply refinance the loan one more time if rates begin to rise to a level you find unacceptable.

Refinancing is a great way to lock in depressed interest rates on your home loan or to squeeze equity from your current ownership in order to fund a home improvement project. Just make sure you do your homework before signing any new loan documentation.

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