What if we told you there was a way to make a hundred grand without working any extra hours or taking any risks?
You won’t learn this trick in high school, or even at most colleges, unless you’re an economics or accounting major.
The “trick” is a mortgage refinancing strategy that’s legal, safe, and likely to get a quick stamp of approval from your spouse.
We also show you what risks and pitfalls to avoid when refinancing.
Keep reading to discover how you can pay the least amount of interest, save the most amount of money, and free yourself from mortgage payments years earlier than you planned.
Here’s what we’ll cover:
- What Is Mortgage Refinancing?
- Pros And Cons Of Mortgage Refinancing
- How To Refinance Your Mortgage The Right Way
- What Risks You Should Avoid When Refinancing
What is Mortgage Refinancing?
Mortgage refinancing means you take out a new loan to pay off your current mortgage loan.
The new loan allows you to start over and negotiate a new interest rate, term length, and monthly payments.
You can refinance your mortgage with any lender — you don’t have to go through the bank that issued your original loan.
And, you can refinance your mortgage as often as you like. Some lenders require you to wait six months before refinancing again, while others are more liberal with timelines.
When you refinance your mortgage, the bank does a “hard credit pull,” which may negatively affect your credit score by a few points.
However, you can get refinancing quotes from several lenders without harming your credit.
- According to a report by TheMortgageReports, if you get all your quotes within 2-4 weeks, they all count as one — so the effect on your credit rating is minimal.
- Or you can visit a site like Credible.com that instantly provides you with several quotes without affecting your credit score.
Mortgage refinancing is a popular transaction for homeowners because it lets you secure a lower interest rate while also offering you the chance to adjust the terms and conditions of your original loan.
When interest rates drop to all-time lows, people flock to their lenders to refinance because lower rates mean you can save thousands of dollars, lower your monthly payments, and pay off your home sooner.
Sounds great, right?
Here’s the downside: without the right strategy, mortgage refinancing can cause more harm than good.
Unfortunately, refinancing can also increase your debt and put you at risk of losing your home if you don’t take the right approach.
In the next sections, we explore the pros and cons of refinancing so you understand how to use the opportunity to your benefit instead of putting yourself and your family at financial risk.
The Pros And Cons Of Refinancing Your Mortgage
Strategic refinancing can save you a ton of money and help pay off your home years earlier than you planned. However, if you’re not careful about how you refinance, it can have the opposite effect.
Mortgage Refinancing Best-case Scenario
Refinancing the right way can have a significant, positive impact on your long-term financial situation.
When you approach refinancing as an opportunity to save money and build wealth over time, it can have a significant positive impact on your future.
For example, imagine your home is currently worth $350,000 (up from the $250,000 you paid for it), and you now owe a balance of $200,000 at 6% interest, with 20 years left on your loan.
Then, interest rates suddenly drop and you decide to refinance your mortgage.
After a few minutes of online research at a site such as Credible.com, you find a lender offering a 4% interest rate. So, you refinance your home mortgage (for only the amount you owe on your previous mortgage) at the new rate with a 30-year term, dropping your $2000 monthly mortgage down to just $1500.
Instead of making the minimum payment, though, you continue making $2000 monthly payments.
In this example, you would become debt-free in 15 years AND save over $100,000 throughout the life of your mortgage.
Refinancing can deliver serious financial benefits if you approach it in a logical way. For example, a new, lower-interest mortgage can help you build wealth because you’ll spend less money on bills and more on things that can grow your wallet, such as investments.
Mortgage Refinancing Worst-case Scenario
The temptation of using mortgage refinancing to upgrade your lifestyle can lead to financial disaster if you’re not careful.
Imagine your banker calls to tell you that interest rates have recently dropped, and that you should consider refinancing your mortgage immediately to take advantage of the new low rates.
During your conversation, the eager banker also reminds you of the boat you’ve always dreamed of, and offers to work an extra $100,000 cash into your loan so you can buy it.
You know that working an extra $100,000 into your mortgage refinance isn’t the perfect financial plan for the long-term, but the immediate benefits are huge:
- You get lower monthly payments.
- You get to go buy a boat.
- You can take a little cash off the top of the loan to cover a few bills or take an extended vacation.
This all sounds like a dream come true, so you give your banker the “okay” to go ahead and draw up the new loan.
A month or two down the line, though, you begin to regret the way you refinanced because:
- You find out that your neighbor refinanced their mortgage the same week you did, but got a loan with an even-lower interest rate and zero fees.
- You realize that you borrowed more money than you should have and, wow, those closing costs really added up, too.
- Owning a boat turned out to be far more expensive than you imagined. As a result, you’ll need to work a few extra hours a week to pay for it, leaving very little free time to enjoy it
This all sounds bad, but these issues are small compared to what happens down the line.
Fifteen years later, your boat needs thousands of dollars in repairs that you can’t afford, and it’s been sitting in the marina, unused, for ages.
Then, life happens.
You lose a job, someone in your family incurs medical expenses, or a pandemic hits that devastates your steady monthly income.
If you had refinanced the right way, your home would have been paid off by this time and you could enjoy financial security and a low-stress lifestyle, even when the rest of the world is insecure.
Instead of enjoying a stress-free lifestyle free of home debt, now you have another 15 years of mortgage payments ahead of you — and not enough income to pay the bills.
Adding “insult to injury,” you’ll end up paying an additional $100,000 over the lifetime of your mortgage than you would have if you refinanced the right way.
In this worst-case scenario, you’re not alone.
You’ve made a few of the most-common mistakes people make when refinancing their mortgage.
Understanding how to refinance your mortgage can mean the difference between a financially stress-free life or struggling to keep up with the bills and living in fear of losing your home.
That’s why, in the next sections, we show you how to refinance your mortgage the right way, and help you understand how to avoid common refinancing pitfalls that put people deeper in debt.
How To Refinance Your Mortgage The Right Way
Refinancing “the right way” means taking steps to ensure that your new mortgage loan saves you as much money as possible while allowing you to pay off your home earlier than your current mortgage.
Before you choose a lender, consider the following four steps as a strategy for ensuring that your mortgage refinancing improves your financial health and quality of life.
1. Refinance For Only The Amount You Owe
If you owe $195,000 balance on your mortgage, then refinance for $195,000.
Remember, bankers make money from debt, so lenders will often try to persuade you to add some cash into your mortgage refinancing.
Resist the temptation to use refinancing to get extra cash for a new car, boat, or long-awaited vacation.
Adding extra cash to your loan means paying out more interest over time. The debt will probably outlive any purchase you make, and you’ll spend the next three decades working to pay it all off.
2. Compare Quotes Before Choosing a Lender
Before you choose a bank to refinance your mortgage, compare quotes from several lenders.
Interest rates may vary from one financial institution to the next, so be sure to shop around for the lowest interest rates.
When you’re comparing quotes from lenders, consider looking for one that offers no-fee refinancing, which will help you save more money. To quickly compare mortgage refinancing rates from multiple lenders, visit Credible for personalized quotes that don’t harm your credit score.
3. Choose A 30-year Fixed Term That Lowers Your Mortgage Payments
When you refinance, you get to choose your term length — in other words, how long it will take (with minimum monthly requirements) to pay off your mortgage.
We suggest you take out a 30-year fixed term loan, even if you currently only have 20 years left on your mortgage.
The reason we recommend a 30-year term is because this keeps your required monthly payment low and your interest will stay locked in at the same rate for the life of the loan.
Lower monthly payment requirements reduce your risk of not being able to afford your mortgage in case of a life-altering financial emergency such as extraordinary medical bills or extended loss of income. And, fixed interest means that no matter what happens in the world or to your bank, your interest will remain the same.
Rather than take out a shorter-term mortgage that raises your monthly mortgage rates, consider a 30-year loan term, then pay a bit extra on your mortgage each month.
4. Continue Making The Same Monthly Payments
The fourth and final step of smart refinancing is to continue making the same-size mortgage payments as you did before you refinanced.
And, check with your lender to ensure that the overage always goes directly toward your principal balance.
If you’ve followed all the steps until this point, you’ll have refinanced with a 30-year term length, and your monthly mortgage payment requirement is less than it was before.
So, if you were paying $2000 a month before you refinanced, and your new payments are just $1500, you’ll keep making $2000 mortgage payments.
These overpayments create huge long-term advantages.
For example, imagine you owe $200,000 on your mortgage, and you refinance at 4% interest with $1500 monthly payments over a 30-year term.
Instead of making the lower monthly mortgage payments of $1500 a month, you keep paying $2000 like you always have. Your lender charges no prepayment penalties, and you’ve checked to ensure that the extra payments are going directly to your loan’s interest.
Here’s what happens:
- You save about $100,000 over the lifetime of your mortgage
- You pay off your loan 15 years earlier than required and 5 years earlier than you would have if you never refinanced.
This opportunity exists because loans are “front-loaded” — meaning you pay more interest and less principal during the early years of a new loan.
However, anything you pay over and above the minimum monthly requirement can be put toward the principal (the amount you actually borrowed).
Making larger payments slashes the amount of interest you pay over the lifetime of your loan. As a result, you save a significant amount of money and are debt-free years earlier than you originally planned!
Before you refinance your mortgage, make sure your new loan comes with no prepayment penalty and that any extra payments will go directly towards your principal balance.
The Risks Of Refinancing
The following mistakes can result in a mortgage refinance that you regret for the rest of your life.
Instead of trapping yourself into chronic overtime hours to keep up with the mortgage (for the next 30 years), avoid the following mistakes when you refinance your mortgage:
- Don’t skip the research it takes to find the best refinancing rates.
- Don’t refinance your mortgage for more than the amount you currently owe.
- Don’t pay exorbitant closing costs – instead, look for no-fee refinancing!
- Don’t agree to a loan that penalizes you for early payments.
Also, keep in mind that one of the greatest risks of mortgage refinancing is allowing your favorite banker to make decisions for you.
Distance your banker from your wallet! Lenders make money when people go deeper into debt, so they can be very convincing.
Know your refinancing strategy before you speak to a banker, so you don’t get sidetracked by additions or perks that can harm your financial future.
You can refinance with any lender, so remember to compare quotes before you commit!
Setting A Mortgage Refinancing Strategy
Refinancing your mortgage can provide you and your family with significant long-term benefits, if you approach it with the right strategy.
Before you refinance, compare quotes from several lenders with a comparison site like Credible.com to find the best interest rates, fees, and terms. After you refinance, pay more toward your monthly mortgage than what’s required, which will save you a ton of money and help you become debt-free many years earlier than you expected.
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