Finance, Loan, Debt and Credit.

May 29, 2013

Main Benefits Of Refinancing Your Mortgage

Simply put, refinancing your mortgage means that you are converting your current mortgage into a new mortgage which is usually at a lower interest rate. Not surprisingly, most homeowners will refinance at least once during their lives. In fact, statistics show that the average homeowner refinances their mortgage once every four years. And even someone with poor credit can sometimes find it easier to refinance because they already have approval for the original loan.

The biggest advantage to refinancing your mortgage in the short term, as your monthly payments will be lower; and in the long term, as you may not pay as much in interest. The market value of your house and the amount of mortgage financed can also make a big difference. If your current mortgage is for several hundred thousand dollars, even a slight reduction in the interest rate will mean much lower monthly payments. An interest rate of just one point less can potentially save you around $5,000 on the average 15 year mortgage. Some financial experts advise that it is only worth refinancing if the interest rate on your new mortgage will be at least 2% lower than your current rate. This is only a generalization and ultimately the decision whether to refinance or not is up to you.

Apart from saving money, the other main benefit of refinancing a mortgage loan is to lower the term, or length, of the mortgage. If you have a 30 year mortgage and refinance to take advantage of lower interest rates, you may also be able to shorten the term of the mortgage at the same time. This will make it possible to own your home outright in less time. The monthly payments on a 15 or 20 year mortgage will surely be higher, but if you can afford to pay the extra amount, it’s an effective way to achieve home ownership more quickly. If you don’t want to refinance your mortgage, or you think you won’t really benefit from it, consider paying an extra amount towards the principal each month, a strategy that will also lower the length of your mortgage.

Refinancing also allows a homeowner who has an adjustable rate mortgage (ARM) to switch to a fixed rate mortgage, (FRM) not only saving money, but offering peace of mind as well. If mortgage rates are on the way up, it may be a good idea to refinance at a lower fixed rate; if you have a fixed rate mortgage at a rate that is on the high side, it may benefit you to refinance to an adjustable rate mortgage. Whether you go with the fixed rate or the adjustable rate ultimately depends on your finances, your short term goals and the general state of the economy. The terms and conditions of a fixed rate mortgage are also protected by law.

One of the benefits of refinancing is to use some of the equity in your home for other expenses. You don’t have to be nervous about doing some much needed home improvements, sending your child to college, or debt consolidation. Using the equity to improve your home will increase the value of your home even further. If you refinance with a larger principal amount in order to receive some cash back, it is known as cash out refinancing. A loan that is secured on your home usually, but not always, has a lower interest rate than various other types of loans, such as an unsecured loan and most credit cards. This method also allows you the convenience of extra cash without having to take out a second mortgage.

Even if interest rates have not changed, it may make sense to refinance if you didn’t have the best credit score when you originally applied for your loan. Lenders tend to offer lower rates and better terms to those borrowers with better credit. So if several years have gone by, you have paid all your bills on time and built up some credit, check to see if it’s worth your while to refinance your home. Your credit score can make a huge difference. A credit score that is below 630 can mean that your monthly payments are anywhere between $50 and $250 higher.

There are various costs and fees involved with refinancing your mortgage and you should consider carefully whether this option is right for you. Generally speaking, if you are going to save money, it probably makes sense to refinance. However, it also depends on your overall financial situation and whether you intend to stay in the house for more than a few years. If you live in a one bedroom condo with just your spouse and you are thinking about starting a family, it probably doesn’t make any sense to refinance. You should always consult your tax advisor and a mortgage broker to make sure that it’s the right decision for you.

 

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