Refinancing is considered a viable option in debt management. In simple terms, you can pay off your existing loan with a new loan that has better terms than the original loan. Almost all types of loans can be refinanced. Home mortgage refinancing is a good option – though it should not be an off-the-cuff or a random decision. One has to consider multiple points based on your specific financial situation rather than prevailing interest rates.

A few points that can help clear your questions regarding home mortgage refinance are:

Know your numbers

• Home equity
  The difference between the current worth of your home and the balance of the mortgage is considered home equity. Home equity can increase if the value of the home increases, as well as when you clear the mortgage against it. Conversely, home equity is reduced if your home’s value reduces or you cannot pay the mortgage payments as per schedule. If you have home equity of about 20%, the chances of refinancing are better.
• Credit scores
  If your credit score is high, you can qualify for refinancing with lower interest rates. In case of poor or bad credit scores, you can still get refinancing but at higher interest rates.
• Debt-to-income ratio
  This is the percentage of your monthly income that goes into paying off monthly installments on your debts. IF your DTR is under 28%, there are better chances of lenders considering your home mortgage refinancing.

Reasons for refinancing

• Lower interest rates
  One of the most popular reasons for home mortgage refinancing is getting a fresh loan with a lower interest rate when interest rates drop.
• Shorter-term
  Using the drop in interest rates, reducing the term will only lead to a small increase in monthly payments. People who want to pay off a loan quickly can go for it.
• Convert to a fixed-rate mortgage or adjustable rates
  If your current loan is under an adjustable-rate mortgage, fluctuating rates can lead to rate increases. If you are under the fixed-rate mortgage for long terms, like 30 years, you can move to an adjustable-rate mortgage as monthly payments are lesser. Refinancing allows you to move from one rate to another.

Some opt for home mortgage refinancing for a home makeover or to consolidate their debt. There have been instances when people have opted to refinance their home mortgage as they faced an emergency need for cash. Work out the cost and benefits before deciding.

Understand costs of refinancing
The purpose of refinancing is that it saves you some money. Work out the costs and compare them. Read the plan carefully to see if the costs are not wrapped into the loan. The cost of a home mortgage will range between three and six percent. Some plans come with no-cost options but will charge higher interests. If the costs of home mortgage refinancing are higher than the interest savings, it may not be a wise idea.

Term of refinancing
If you are refinancing just for lower interests, you should also verify if the term of the new plan is longer than the first loan. If you want to pay off the debt quickly, you should choose a shorter loan with affordable payments.

Refinancing points
A unique concept in the American home mortgage, mortgage points, is a type of fee paid to the loan officers to reduce your interest rate on your home mortgage. One discount point will cost you about one percent of your loan amount. That is, if your loan amount is $100,000, one discount point is $1,000. Though it doesn’t bring you any overall cost-benefit, it can reduce monthly payments by a bit.

Weigh all your options, including costs, and compare the interest rates. Refinancing your home mortgage will be worthy only if you same money in the long term.