Taking out a mortgage makes many people feel as though they are committing to making a monthly payment for the rest of their lives. Recent studies have shown that an overwhelming number of people never pay off their mortgages. Many look at refinancing as the best path to paying off their house. While refinancing can get you a lower interest rate, refinancing can be both tricky and problematic. Take a look at why refinancing may not be your best option, and what other strategies you can take to own your home as quickly as possible.
The Downsides of Refinancing
The hassle of applying for a new mortgage
Refinancing means you are applying for a brand new mortgage, and while this can help with interest rates, the process of applying for a new mortgage can be long and arduous. If you've had changes in your income or credit since you applied for your existing mortgage, this will likely slow the process or bring it to a halt altogether. A lower salary or credit score may cause lenders to reject you or approve you at a higher rate than what you're paying. Having an existing mortgage does not guarantee that lenders will approve your new application. Lenders may also request various forms of paperwork, such as tax returns and pay stubs.
While the idea behind refinancing is to save you money, don't forget that you will be paying for the refinancing. Like with your existing mortgage, you will be required to pay closing costs when you refinance, which can range between 3 to 6 percent of the loan balance. These are typically needed upfront at the time of closing, and if you're refinancing into an FHA loan, you'll also have to pay a fee for mortgage insurance. Consider whether you would be saving enough with the refinancing to more than offset the costs associated with it.
When refinancing, you first have to go through the appraisal process, which will use recent sales in the area to determine your home's value. If the appraiser determines that your property is worth less than what you owe, you may be denied a refinancing.
Tips for Paying Off Your Mortgage
Anything extra that you can put towards your mortgage each month will help save you money in the long run and help you pay it off more quickly by cutting down on interest. Just be sure to call your mortgage servicer to ensure that anything you are paying beyond your regular payment is being applied properly towards the loan.
Make extra payments
One option to help you is to make payments beyond your monthly payment. If you can afford to make one full additional payment per quarter, you will be in great shape toward shaving down that mortgage. If once per quarter is too much, try to make one extra payment per year.
Add to your monthly payment
Another option is to divide your monthly fee by 12 and add that amount to your monthly payment, which will then add up to one full extra payment each year. It can even be as simple as rounding your payments up, which will allow you to pay a little extra each month.
Switch up your payment schedule
Contacting your lender to switch to bi-weekly payments instead of monthly payments can also help cut down on cost and time, and you'll barely even notice.
This is because paying bi-weekly means you're making more payments a year, than you would be paying monthly, you can shave up to six years off a 30-year mortgage.
Put extra money to work
If you receive a raise or a bonus, up your payments accordingly, consider putting your tax returns or any “found" money, such as an inheritance or even a winning poker hand, towards your mortgage. If you have investments, such as bonds or CDs, that are maturing, you may think about putting the principle, the earnings, or both towards your mortgage payment, rather than reinvesting. Making a lump-sum payment can make a considerable dent in the interest.
Check your mortgage terms
However, if you do plan on making extra payments towards your mortgage, look into the terms of your loan. Some mortgages have prepayment penalties, which means you could be incurring a fee if you try to make extra payments or increase your monthly payment. Other mortgages may allow prepayments, but only at certain times during the loan. Give your lender a call to help clarify the terms, and to find out if there are any specific actions you must take to ensure that your payments are being put to use correctly.
Your mortgage is most likely the largest loan you will ever take out, and imagining life without a mortgage payment may seem like a far-off dream. Many people who feel this way often turn to refinancing without taking into account the potential disadvantages that come along with it. While refinancing can be a good option for some, it is essential to do your research to find out whether refinancing will truly be worth it for you in the long run. Refinancing is not the only strategy to pay off your mortgage in this lifetime. By giving your mortgage a little extra attention, and making sure that you know the terms of your loan, life without a mortgage payment could be closer than you thought.
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