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Some Good Reasons To Refinance
To determine if refinancing is right for you, you should
think about your reasons for refinancing. Refinancing
your current loan may make sense for one or more of
these reasons:
* If you want a lower interest rate and monthly payment
* If you want a fixed monthly payment rather than one
that can increase as interest rates rise
* If you want to use some of your home equity to pay
for home improvements, education costs, or other needs
* If you want to build equity in your home at a faster
rate
* If your credit rating has improved since you obtained
your current mortgage loan, and you want to benefit
from more favorable loan terms.
The better you understand your motivations, the easier
it is to work with a mortgage lender or mortgage broker
to discuss your refinance options and arrange the right
refinance transaction for you. Lower Your Interest Rate
The most common reason for refinancing is to lower the
mortgage interest rate and the monthly payment. A lower
interest rate will result in a lower monthly payment
as long as you don't significantly increase the principal
balance of your mortgage loan by "cashing out" some
of the equity or value you have built up in your home.
When interest rates are low, refinancing out of a higher-rate
loan may make good business sense. For example, suppose
you decide to refinance from a $100,000 30-year fixed-rate
mortgage at a 7.5% interest rate to the same mortgage
amount and term at a 6% rate for a cost of $2,000. Your
monthly payment of principal and interest for the new
loan would be $599.55 versus a monthly payment of $699.21
for the old loan. As a result, you would save roughly
$100 per month on the principal and interest portion
of your mortgage payment. When considering a refinance
to obtain a lower rate, it is important to know how
long it takes to recoup the cost of the refinance transaction.
In the previous example, you would break even on your
$2,000 cost to refinance after 1 year and 8 months of
monthly payments. If you plan to sell your home in the
very near future, refinancing might not be your best
option. However, if you plan to remain in your home
well beyond the time it would take to recoup your refinance
costs, you can save a considerable amount on interest
payments over the life of your loan. Change Loan Products
You may want to use a refinance transaction to switch
from one type of loan product to another, such as from
an adjustable-rate mortgage (ARM) loan to a fixed-rate
loan. This may make sense if interest rates have fallen
since you took out your ARM and you now want the assurance
that your interest rate will remain the same for the
life of your loan. Your mortgage payments with an ARM
adjust with changes in market rates: when interest rates
change, your monthly payments change at the next rate
adjustment period. The interest rate on an ARM will
adjust periodically (for example, annually, every six
months, or monthly) after an initial fixed period. But
with a fixed-rate mortgage, your interest rate stays
the same for the entire term of your loan. You may have
selected an ARM when mortgage interest rates were higher
because it offered a lower initial interest rate and
monthly payment than a fixed-rate loan. When interest
rates fall, refinancing to a fixed-rate loan can guarantee
a lower interest rate for the life of the loan. Here
is another scenario. You might want to change from one
type of ARM to another to get a better combination of
rate and term. For example, you may want to switch from
a one-year ARM (in which the rate adjusts annually)
to a 5/1 ARM (in which the new rate remains fixed for
the first five years and then adjusts annually). Before
you decide to refinance from one type of ARM to another,
you should compare the financial index, margin, and
any rate caps on your existing ARM with current market
rates. It is important to understand how often your
mortgage will adjust and how much your payment can change
with each adjustment and over the life of the loan.
Also, be sure to ask your lender or mortgage broker
whether any conversion terms apply or if there are costs
to convert to another type of mortgage. Tap Home Equity
Equity is the difference between what a property is
worth and the amount still owed on the mortgage. You
build equity in your home with each monthly mortgage
payment. A portion of your payment is used to pay principal
— helping you build equity by reducing the loan balance
— and the rest is used to pay interest, taxes, and insurance.
You may also have additional equity built up in your
home if it has appreciated in value since you took out
your loan. You can use a refinance transaction to tap
into the equity you've built in your home and borrow
additional funds, for example, to pay for home improvements,
educational expenses, or a major purchase. This is often
referred to as a "cash-out" refinance. Build Equity
Faster You may want to refinance in order to build equity
more quickly than you can with your current mortgage.
This may be desirable, for example, if you are nearing
or planning for your retirement and you want to pay
off your loan more quickly. By refinancing from a 30-year
mortgage to one with a shorter term — such as a 10-,
15-, or 20-year mortgage — you increase the amount of
your monthly payment that goes toward reducing the principal
balance of your loan. This approach typically makes
sense for homeowners who can afford an increase in their
monthly mortgage payment because generally the shorter
the loan term, the higher the monthly payment. Get More
Favorable Loan Terms You may now be in a high interest
rate loan because that was the only type of loan offered
to you due to problems with your past credit history.
Since you took out your loan, you may have improved
your credit rating. If so, you may be able to refinance
to obtain a loan with more favorable terms and a lower
interest rate. Refinancing to a lower rate loan may
save you a significant amount in interest costs not
only each month, but also over the life of the loan.
For information and educational purposes only. |
