At some point during your mortgage term, you may consider refinancing your current loan. Whether it is to consolidate some debt, take advantage of some better interest rates, or take some money out against the equity of your home, there are many reasons why a homeowner may be interested in a refinanced loan. Keep reading to see some reasons why your family might consider a refinance on your home loan.
What is a Mortgage Refinance?
A mortgage refinance is financial process where you take your family's existing home loan and replace it with another loan. The old loan is paid off by the bank or mortgage company you obtain the new loan from. From that point forward, your loan payments are made on the new loan. Usually, there's a cost (closing costs are one example) so there needs to be a good reason for a refinance to make financial sense.
Six Reasons to Refinance Your Mortgage
These may include, but are not limited to, the following six categories:
Obtaining a Lower Interest Rate
One of the most popular reasons for refinancing a current mortgage is to take advantage of interest rates that are lower than when you took out your original loan. This decrease in rates can come from an overall drop in the average interest rate or an increase in the borrower's credit. It is vital that when looking into refinancing at a lower interest rate, you take into account the closing costs and fees that will be associated with a refinance to make sure it is worth the switch.
Lower Your Family's Payment
Some folks look at a refinance as a means to reduce one of their biggest, or the biggest, bills every month. This can be the result of a lower interest rate, but could also be due to refinancing with a smaller loan balance than when you originally bought your home. If a lower payment helps free up part of your budget for other obligations or goals, it could be worth considering.
Unfortunately, debt such as credit cards and high-interest loans can result in a significant amount of interested paid during the repayment period. Many homeowners use their home to pay off this debt and repay the money at the lower mortgage interest rate. When considering this option, be sure to calculate the amount of interest you will pay throughout the life of your mortgage, and see if this repayment method will be the most cost effective for your finances.
Eliminating Private Mortgage Insurance
If the home was originally purchased when you had a lower credit score or a smaller amount for a down payment than was needed for a traditional loan, you were likely placed into a loan that required private mortgage insurance. PMI results in a higher monthly payment for insurance to protect the bank in the event of a foreclosure, since either there was less equity put in the home or it was considered a higher-risk loan. Once you have established equity in your home, you may be able to refinance to remove the PMI and obtain a lower monthly payment.
Change the Mortgage Term
When you first buy your home, you will often determine the term of your loan based on what you are approved for and how much you can afford for a monthly payment. As with anything in life, your situation can and often does change. You may find yourself wanting to refinance your mortgage to be able to shorten the term of your loan to pay less interest over time and get your house paid down earlier. For example, you could move from a 30 year loan to a 20 year loan. If you are having a harder time affording your current payment, you may consider refinancing to extend out the term of your mortgage and reduce your payment to make it a better fit with your current budget.
Moving from Adjustable Rate to Fixed Rate
A home mortgage fit broadly into either an adjustable rate or fixed rate. Generally, a fixed rate has an interest rate locked in for the life of the loan. Adjustable rates, tend to have lower rates, but can also go up (or down) over the life of the loan. Some families get an adjustable rate loan to get a lower rate or payment, but later decide to refinance to get the certainty of a locked in rate over time with a fixed-rate mortgage. If you plan to stay in the home for a while (at least a few years), then the move to a fixed rate could be a benefit for some families.
No matter the reason, refinancing your mortgage could be a good option for you. It is important to research and consider all the factors before making your final decision.
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