Refinancing is not uncommon in the Beehive State, for most Utahns who can jump at the chance to lower their mortgage rates.
Capitalizing on the opportunity to pay less interest moving forward is not the only motivation compelling qualified homeowners to replace their old loan with a new one, though. Some do it to switch from a fixed-rate loan to an adjustable-rate one while others want to change mortgage terms.
Any mortgage broker in Provo, Utah, or any nearby community will say that loan consolidation is another reason why homeowners do cash-out refinancing. It turns equity to cash, unlocking some liquidity to pay other debts with higher interest rates.
When land prices go down, shrewd homeowners refinance to take out cash and minimize their losses. Other individuals find a refinance as a convenient vehicle to buy something out of the contract or to ditch the Private Mortgage Insurance.
Refinancing your mortgage can serve multiple purposes. However, it is not all roses. This move comes with several implications, which you must be aware of to calculate the risks you will take if you decide to pull the trigger on it.
Below are the considerations you should keep in mind before walking into a lender’s office.
Your Credit Score Will Go Down
Applying for a mortgage refinance will trigger a hard pull, a negative item that will stay in your credit report for 24 months but will only affect your credit score for a year.
Before you freak out, a hard pull will only shave off about five to 10 points of your credit points. But then again, your loan application can impact your borrower profile if you have a limited credit history.
To avoid multiple credit score reductions when requesting for estimates from numerous lenders, shop around within 30 to 45 days. All mortgage-related inquiries done during this period usually count as one, so they are not as harmful to your credit score.
Your Loan Term Will Reset
A mortgage refinance is a brand-new loan, so it entails a new term. You can apply for a refinance to shorten or increase your loan term, but understand that will reset your amortization calendar. In other words, significant portions of your early payments will go towards the interest again. It might take a while before you can see considerable reductions to your principal balance, which is your real debt.
After receiving estimates, compare the offers you get by calculating the overall cost of borrowing of each. Find out when will be your break-even period to know whether refinancing your loans makes sense in the first place. If you intend to move before the break-even period, sticking to your current mortgage can be the more financially sensible decision for you.
You Will Have to Pay Closing Costs Again
Speaking of the overall cost of borrowing, add the closing costs into the equation. These fees can vary from lender to lender, so read good faith estimates thoroughly to know which ones offer the most savings.
A mortgage refinance is a significant decision with long-term financial implications. Be cautious in your choices, and do not take out a new loan unless there is a strong reason to do so.