The most popular reason to refinance a loan is to reduce your monthly payments, this is known as “rate and term” refinance. By refinancing your loan you reduce the applicable rate, bring down the per-month payment and cut short the interest payable over the life of your loan.
There can be several ways in which you can refinance to lower your monthly payments. The first method is reducing the term of the mortgage. The shorter the time of pay back, the lesser will be the interest charged on the loan, the less you’ll have to pay your lender. So instead of going for a thirty years pay back plan, ten of fifteen of twenty years plan will save you a handsome amount in shape of saved interest. But keep in mind that the monthly payment is likely to increase in this case.
The second way of refinancing to lower your monthly payments would be to switch from an Adjustable Rate Mortgage (ARM) to a Fixed Rate Mortgage (FRM). You may have chosen ARM in the start because of smaller monthly payments to start with, or because you were planning to live in this home for a smaller period of time, but now you realize that your ARM monthly payments have risen quite considerably, causing you problems in coping with your finances, or you might have given up the idea of shifting, so now you need to refinance your loan and switch to the security of FRM.
The third way is to add to your mortgage balance and get a check back from your lender at the closing. The interest costs on home mortgage loans are deductible for tax purposes. If you are stuck in high interest loans like credit card, personal or education loans, the best way is to take your cash out of your home and pay these loans. But this is only possible when you have a home equity available. Some refinance companies offer up to 80% of the market value of your home.
If you bought your home with less than 20% down, then your finance company would have insured your loan from a Mortgage Insurance (MI). As your house appreciates, so will your equity. If your home value is appreciating and your balance is decreasing, it will also increase your equity. If one of these or both occur and your equity increases from 20%, the savings of getting rid of MI will allow refinance. In some cases may also be cancelled automatically under the 1988 act of homeowners’ protection.
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