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Your Guide to Home Loan Refinancing

Home Loan Refinancing-

There are several reasons why you may  consider refinancing your home loan.

  1. Interest Rates May have Fallen
  2. Your credit score may have improved
  3. You may want to change to a different kind of mortgage

 

Benefits of Refinancing your mortgage.

Securing Lower Interest Rates

The #1 reason most people decide to refinance is to lock in lower interest rates. Of course, there is a direct link between the interest rates on your home loan and your monthly mortgage payment. The lower the interest rate, the lower your monthly payment will be. By knocking off a percent or two you can drastically reduce your monthly payment or apply a greater portion of the payment to principal and thus equity can be built in your home much faster. If there have been improvements in your credit score or the market conditions have changed, securing a lower interest rate may be possible.

Changing the Mortgage Term

Decreasing the Term

Refinancing a home to decrease the mortgage term is another way interest rates can be lowered. Not only are the interest rates of a 15-year mortgage lower than that of a 30-year mortgage, but the total interest costs are drastically decreased because the home loan will be paid off in a much shorter time. While a shorter-term home loan results in monthly payments that are higher, more of the principle will be paid each month. If you can swing slightly higher monthly payments, it can be extremely helpful to reduce the term of a home loan. If you can combine a shorter term with a lower interest rate you may end up keeping your monthly payments roughly the same and whacking 15 years off your home loan.

Increasing the Term

On the other hand, if you need to lower your monthly home loan payments because of other financial considerations you might consider refinancing with a longer term. This will spread out your principal payments lowering the amount you owe every month but will also increase the amount that is paid toward the interest, as well as the time length mortgage payments will have to be made. your overall payments will increase but it might create a little extra breathing room every month.

Switch from an Adjustable-Rate Home Loan to a Fixed-Rate Home Loan

The fluctuation in mortgage payments that can occur with an adjustable-rate mortgage or ARM can be a bit scary. This is especially true for individuals that have been laid off work or have experienced an emergency situation that has caused financial difficulties. There is peace of mind in switching to a fixed-rate home loan, as the interest rate and monthly mortgage payments will not change. Other than, of course,  escrow amounts for insurance and taxes if they are included in your monthly payment. If interest rates have fallen significantly it may be beneficial to lock in the lower rate rather than risk an increase at a later date.

Home Loan Refinancing to an ARM that has Better Terms

One option of home loan refinancing is to obtain another adjustable-rate home loan that offers better terms. This can be beneficial if the interest rate that starts out is lower than the current interest rate you are paying. You may find you can secure an ARM that has payment caps that are lower and the adjustments of interest rate may also be smaller. When another ARM is considered it is important to ask questions in regards to possible rate adjustments, and to look at the initial rate as well as the fully-indexed rate.

Cash-Out Refinancing

The difference in dollar-value between the balance owed on a home loan and the value of the home is referred to as home equity. When a home is refinanced for a higher amount than the amount owed on a home, cash can be received for the difference. This is an option that many homeowners choose when home improvements need to be made, and for other important expenditures such as a child’s education.

If you have been paying on a home for a long period of time, you will want to carefully look at all other options before choosing home loan refinancing. This is simply because the amortization (repayment) process automatically restarts; meaning less of your payments will be applied towards the equity of your home plus you will have additional closing fees and other expenses involved in refinancing.

Home Equity Line of Credit (HELOC)

A home equity line of credit works much like a checking account with your home equity as collateral. It has some benefits that refinancing doesn’t in that you can set it up and then save it for an emergency without it costing you anything in the mean time. Also there are no closing fees and once it is set up there is no wait time, you can just write a check if you need to. The disadvantage is that if you lack self -control it might might be too easy to spend all your home equity that you worked so hard to accumulate.

 See Also:

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