|
Why you should consider refinancing your existing mortgage?
Refinancing is simply taking out a new mortgage. If you are considering refinancing your home loan, the first steps are determining your short and long term goals and then evaluating the different types of refinance programs available. Once you have your goals to what's available, you will be able to make an informed decision on how you want to proceed.
The first thing to consider is your current interest rate. If you purchased your home when interest rates were high or if you have an adjustable rate mortgage, chances are refinancing to a different- lower term may be able to save you money immediately and over the course of your loan.
If you purchased or refinanced your home when interest rates were low, refinancing may not be the best thing to do. In the past, it was a general rule that refinancing makes good financial sense if your current interest rate is at least 2 percentage points higher than the current market rate and you plan on owning your home for at least 3 years. The 2 point difference in the interest rate was necessary in order to recoup refinance fees. Nowadays, it makes sense to consider refinancing with less fluctuation in the interest rate because it is possible to refinance and pay no fees or no points! You should consider the length of time for which you will own your home because of the costs involved in refinancing.
Many homeowners are refinancing in order to take advantage of opportunities to trim payments, dispense with mortgage insurance, or to get cash from a home that has increased in value. Traditional rules like refinancing only when rates drop no longer apply; with new low cost and no-cost mortgage refinance options, refinancing can save you a lot of cash, regardless of whether you have long or short-term financial goals.
Here are five solid reasons to consider refinancing your existing mortgage:
1. Reduce Your Monthly Mortgage Payment
The slightest percentage drop can have a large effect when calculated over 15 or 30 years, and so you definitely should consider refinancing when you're able to lock in a lower interest rate. But what many do not know is that you can also change the terms of your mortgage to lower your payment. Switching from a 15 to 30-year term will immediately reduce your mortgage payment. Conversely, if you are looking to save money in the long run, you can save thousands of dollars by refinancing from a 30-year to a 15-year mortgage. As most traditional mortgages include principal and interest payments, still yet another way to reduce your monthly mortgage payment is to switch to a program with interest only payments. Refinancing your existing mortgage is a surefire way to lower monthly payments immediately.
2. Access Cash Quickly and Safely
Not all types of property offer cash-out loans, but if yours does, then you can consider the equity in your home as a kind of savings account that may be accessed through a cash-out refinance. If you have equity, you can use the cash to finance any number of life-changing events. You might pay for new home improvements, take a vacation, pay off credit card debts (since credit card debt interest is compounded whereas mortgage interest is relatively simple and tax deductible, this is an especially attractive option), or pay for your child's education.
The cash-out refinance process is a simple. Any new loan will be larger than the remaining balance of your current mortgage, and will be based on the equity you've already established in the house. Let's say your existing loan is $100,000. You might refinance it with a loan of $130,000, $100,000 of which will pay off the existing loan. After origination fees for the new loan, you might be left with $27,000 to cash out with.that's a nice sum of money to apply to other debts, to reinvest in your home, or to help put a child through college.
3. Switch from an Adjustable Rate Mortgage (ARM) to a Fixed-Rate Mortgage
An adjustable rate mortgage (ARM) is a particularly attractive option for homeowners who do not plan to stay in their home for an extended time period. If you're willing to risk the possibility of an upward market interest rate adjustment, then an ARM is a good option. An ARM could lower your monthly payment dramatically when compared to a 30-year fixed-rate mortgage, for example. On the other hand, if you do plan on staying longer than a 3-5 year period in your home, you might want to switch to a 15, 20, or 30-year fixed-rate home loan. Doing so will provide stability over time, and protect you against market fluctuations.
4. Your Balloon Payment is Due
A balloon payment is a large, lump sum payment scheduled at the end of a sequence of smaller payments over time for a loan or a lease. Just like ARMs, balloon payments lower initial monthly payments and rates dramatically. However, the prospect of a large lump sum payment might be too much, depending on your situation. Refinancing at this point into a new ARM or fixed-rate mortgage might be a smart move.
5. Erase your Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is designed to secure the lender from the borrower defaulting on his/her loan. Often in mortgage loans, especially in low (less than 20%) down payment purchases, PMI is required. Over time, as you demonstrate your ability to make payments on time, and as your home value increases, you may be eligible to refinance your home without PMI playing a future role.
As always, check with lender or broker for specific details. Come prepared, ask questions, gather information and then make your decision on whether or not to refinance, and if so, what kind of refinancing option best suits your short and long-term needs.
|
