Refinancing is the act of repaying a debt with the proceeds from a new loan, using the same property as security.
Financial Goals
When interest rates change in your favor, you may want to consider refinancing your original mortgage loan. You will also have to ask yourself certain questions regarding your financial goals. How long are you planning on staying in your home? What type of mortgage do you have now, i.e. fixed mortgage or ARM (Adjustable Rate Mortgage)? There are times when it makes sense to refinance your mortgage. Based on your personal financial position, it is up to you to decide when and if to refinance your present mortgage loan.
Refinancing From An ARM To A Fixed-Rate Mortgage
If mortgage rates are falling and you currently have an Adjustable Rate Mortgage, it may be prudent for you to consider switching to a Fixed-Rate Mortgage. Since mortgage rates can fluctuate greatly in a fairly short period of time, you may be able to adjust your loan to a fixed-rate and avoid the very real possibility of your interest rate climbing. However, if you are only planning on being in your home for a few more years, it may not be fiscally sound to go through with this form or Mortgage Refinancing. If you are planning on remaining in your home for more than seven years, such a move could prove cost-saving.
Refinancing From A Fixed-Rate Mortgage To An ARM
If you are planning to remain in your home for fewer than nine years, you may wish to refinance your mortgage from a high-interest 30-year Fixed Rate Mortgage to an Adjustable Rate Mortgage with a lower interest rate and corresponding lower monthly payments.
Reducing Your Monthly Mortgage Payment
A reduction of only ½ to ¾ of a percentage point in interest rates may significantly lower your monthly mortgage payment. If you don’t refinance, you may be spending too much every month in mortgage payments. You can accomplish this in one of three ways:
• You can simply choose to refinance your mortgage loan to a lower interest rate, resulting in lower monthly payments.
• You can change the term of your mortgage. If you currently have a 15-year fixed-rate mortgage, you can lengthen it to 30 years. Since the loan is spread out over a longer time period, your monthly payments will be lower. However, if you presently have a 30-year fixed-rate mortgage, you may decide to shorten the term to 15 or 20 years. Although your monthly payments will be somewhat higher, you will be paying much less in interest costs over the life of the loan, saving you thousands of dollars.
• You can also lower your payment by refinancing to an interest-only loan. With this type of loan, you are obligated to pay the interest for a certain period of time; you can continue to pay as much of the principal as you choose. However, you get the flexibility of having lower monthly payments should you need to use your money elsewhere, such as paying for your children’s education or wedding or contributing to your 401K savings account.
You also may wish to refinance by taking out a second mortgage or equity line of credit. The equity in your home is like a savings account. This may be the right option for you should you need to pay off high-interest credit card loans, finance your children’s education or pay for major home improvements, which may significantly add value to your home when you wish to sell.
Sometimes it makes sense to refinance your home; sometimes it may not. It depends on your long-term financial goals as well as how long you expect to remain in your home, how much equity is in your home and if having lower monthly mortgage payments will make up for closing costs, fees and any possible points. Fill out our free contact form so our expert loan representatives can help take the guesswork out of the refinancing puzzle.
