When you have a clear objective in mind for refinancing your mortgage, you're more likely to choose a loan that will help you meet your long- and short-term financial goals. Here are a few good reasons that homeowners refinance:
Refinance to Lower Your Monthly Mortgage Payment
A percentage drop of just one half to three quarters of a percentage point can lower your mortgage payment. If you don't refinance, you may be paying too much every month for your loan, and that's never a good financial move.
There are three ways refinancing can lower your payment. The first is simply to refinance at a lower interest rate. You can also change the term on your mortgage to lower your payment. Switching from a 15- to a 30-year term can significantly lower your mortgage payment. But, if long-term savings is more appealing to you, refinancing from a 30-year to a 15-year mortgage can save you thousands of dollars over the life of your loan. The third way to lower your payment is by switching from a traditional mortgage with principal and interest payments to a mortgage program that allows interest only payments.
Refinance to Access Cash
* Think of the equity in your home as a savings account that you could access through cash-out refinance. You may want to finance an important home improvement that will increase the value of your home, pay for college or pay off high interest credit card debt (read below). Whatever your reason, this may be the right option for you.
Refinance to Pay Off Credit Cards And Other Debt
The difference between credit card debt and a mortgage can, financially speaking, mean thousands of dollars. Why? Credit card debt is compounded where the interest on a mortgage is simple, and often tax deductible. Using the equity in your home rather than credit cards to finance expensive purchases can save you money paid in interest in the long run. Be sure to consult your tax advisor.
Refinance to Convert An Adjustable Rate Mortgage (ARM) to a Fixed-Rate Mortgage
Use the length of time you plan on being in your home to your best financial advantage. If you only plan on staying in your home for a few years, paying a higher interest rate for a 30-year fixed-rate mortgage may be costing you money. Consider refinancing to an Adjustable Rate Mortgage (ARM) instead, and pay a much lower amount each month. Likewise, if you have an adjustable rate mortgage and will be in your home longer than the initial 3- or 5-year fixed period, it might be a smart move to convert to a fixed-rate loan. Download the Consumer Handbook on Adjustable Rate Mortgages.
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Terms Used in this Refinance Article
Fixed-Rate Loan
Fixed-rate loans have interest rates that do not change over the life of the loan. As a result, monthly payments for principal and interest are also fixed for the life of the loan. Fixed-rate loans typically have 15- or 30-year terms. With a fixed-rate loan, you will have predictable monthly mortgage payments for as long as you have the loan.
Term, Loan Term
The period of time which covers the life of the loan. For example, a 30-year fixed-rate mortgage has a term of 30 years.
Cash Out Refinance
Any cash received when you refinance a loan that is larger than the remaining balance of your current mortgage, based upon the equity you have already built up in the house. The cash out amount is calculated by subtracting the sum of the old loan and fees from the new mortgage loan.
For example, if your existing mortgage is $100,000, you might refinance it with a loan of $120,000. After you pay off your current mortgage ($100,000) and any loan-origination costs for the new loan (for example $2,000 in points), you would be left with $18,000 cash out.
Cash-out loans may not be available for all types of property.
Compound Interest
Interest which is calculated not only on the initial loan principal but also the accumulated interest of prior periods.
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