There are various reasons why people are considering refinancing their mortgage. Some of them are thinking of cashing out some money by refinancing their mortgage to resolve their debt problem or to improve their credit ratings, others may consider to refinance a mortgage because they can benefit from today's lowest interest rate ever.
1. Refinancing To Improve Credit Ratings
It is very important to maintain your credit score at a good level in order to enjoy the best deal on the future credit application. If you have low credit score, it is important for you to repair it and restore it back to the good level. However, if you are thinking of refinancing a mortgage for the purpose of improving your credit ratings, then it might not always worth to do so because low credit ratings make a mortgage refinancing
expensive. Unless you are willing to pay the extra costs to refinance a mortgage just to improve your credit ratings, the option definitely not the best scheme. There are better options for credit repairing, the simplest way to increase your credit score is by paying your monthly payments on time. If you consistently make your monthly payment on time for several months, you will see your credit score improve without the need of mortgage refinancing.
2. Cash-out-Refinancing By Liquidating Home Equity
Home equity is the value of your home after deducting the mortgage. For example, your home is worth $200,000 and you have a mortgage of $80,000, then your home equity is $120,000. Generally, you can't use the total home equity but you can do a cash-out-refinancing to liquidate part of it, normally up to 90% for cash expenses. If you are facing a debt problem and you have home equity to be liquidated, then it will be a good option to consolidate the bad debt with a low interest-rate's home equity loan. However, you might put your home at risk just in case you default the loan. So, remember to make the loan repayment on time and don't make the mistake of building up your debt again.
3. Refinancing To Reduce Monthly Payment
If your current monthly mortgage payment is beyond you financial affordability, then refinancing the mortgage can help to reduce it so that the monthly payment won't become your debt burden. What you can do is finding a mortgage that has lower interest rate then your current one and chooses a longer repayment period to lower the amount for monthly repayment. In fact, you are prolonging your existing mortgage if you choose a longer repayment period to make the monthly payment within your financial affordability, be aware that by doing so you are increasing the total interest pay for the new mortgage. However, this option helps to reduce your monthly repayment and it will be a good option if the existing mortgage repayment is too high for you.
Summary
You may think of doing a mortgage refinancing due to any reason, but be sure you consider it carefully to ensure your decision to refinance a mortgage is the best option for your need.
