Pros & Cons of Refinancing Your Home Loan

If you own a house, it’s likely that you have a mortgage along with it. Refinancing your mortgage can be a valuable tool to help you reduce your payments and maybe even get that loan paid off sooner. If interest rates have been falling, or if they’re expected to go up in the near future, then the time to refinance is now.

When you refinance, what you’re basically doing is paying off your old mortgage with a new loan. A homeowner usually does this to take advantage of a lower interest rate, either because interest rates are falling in general or because the homeowner has improved his or her credit score enough to qualify for better terms.

In any case, a good credit score is the key to negotiating a better loan. If you minimize your borrowing, pay your bills on time, and keep a low loan balance, you should see improvements here. Also, you’ll probably be using your home itself as collateral when you refinance, which may help you get a bigger loan. As an added bonus, the interest fees might even be tax deductible.

Now, there are two basic types of mortgage refinancing. You can get a home equity line of credit, which will allow you to borrow up to a set amount of money at a time, or you can get a second mortgage closed-end loan. With a closed-end loan, you receive all of the money up front when the contract is signed. Then, you repay that loan according to the terms of the agreement.

Before deciding between the two options, do your research and compare the interest rates and payments that you’ll be facing with each one. Be sure to consider any and all payments that might go along with the agreement – the following are some of the more common fees that you might encounter.

The Loan Application Fee covers the processing of your application, of course, and the checking of things like your credit history and the value of the home..

A Prepayment Penalty is when a lender charges extra for paying a loan off early. Be sure to read the fine print – you don’t want this if it can be avoided.

Escrowed Funds are funds placed with a third party so they can be used to pay taxes or insurance payments.

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