Mortgage Refinancing Essentials
By Mark Robinson, for Mortgage Genie 12th July 2009
Refinancing your mortgage can be a great idea in times of decreasing interest rates or if your personal situations change such as having access to lump sums to decrease the amount you owe. Below are a few scenarios for when mortgage refinance may be a good bet.
Home Mortgage Refinancing Benefits
The 3 reasons to refinance are simple. 1, save money on your payments 2, reduce your mortgage liability 3, flexibility through product options.
Your house is not only your largest asset but also your largest liability. Monthly mortgage payments can be very restrictive and also are subject to change due to interest rates. Being in control of your mortgage offers you and your family security.. Regular refinancing through the life of your mortgage can keep you in control of your money and not the other way around.
Lower Refinance Rate, Lower Payments
When you purchased your home, while certain factors, like your credit rating and the amount of the down payment that you were able to afford, influenced your interest rate, the single most important factor was the prevailing rates at that moment. However, interest rates change and you ay find that the current interest rates offered are much lower than those which prevailed at the time you first took out your home loan.
By refinancing your mortgage when interest rates are lower, you can exchange a higher interest rate for a lower one, which, in turn, will lower your monthly payment.
Shorten the Length of Your Mortgage when Refinancing
Another advantage of home refinancing is that you can shorten the term of your mortgage. Let’s say, for example, that you originally had a 30-year mortgage and have been paying it for eight years. Thanks to mortgage refinancing, you can switch to a shorter term of either 10, 15 or 20 years. This can save you thousands of dollars of interest. Also, if the refinance rate is lower, but you maintain the same monthly payment, you will build up equity in your home more quickly, because more of your payment will be going towards principal.
Exchange an Adjustable Rate (ARM) for a Fixed Refinance Rate (FRM)
When interest rates are low, adjustable rate mortgages (ARMs) are the housing market’s darlings. However, as interest rates increase, that adjustable rate may not look as sweet. It’s also possible that you opted for an ARM because your financial future was less secure, or you weren’t sure how long you’d stay in your home. If, however, you’ve become financially stable and know that you’ll be staying in your home for several years, it may be beneficial to swap that fluctuating adjustable rate for a fixed one. You’ll have more security knowing that your monthly payment will remain steady, regardless of the current market environment.
Cash-out refinancing
One way to put more money in your pocket is to tap into the equity you’ve built in your home and do a “cash-out” refinancing. In this scenario, you can refinance for an amount higher than your current principal balance and take the extra funds as cash. This can provide money for remodeling your home, paying off high-interest rate bills, or sending your kids to college.