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Find Your LenderRefinance » 5 reasons to refinance
There comes a time when a homeowner realizes now may be a good time to refinance. If you're looking for a lower interest rate, or maybe you just need cash out of your home for personal needs, the top 5 reasons to refinance are outlined below.
Interest rates might have gone down since you obtained your last home loan. Maybe your credit score has improved substantially or you just didn't get the great interest rate you deserved when you originally got your mortgage. Whatever the case may be, you're probably interested in lowering your interest rate to save money on your mortgage payment. Refinancing with the intention of lowering your interest rate is a top concern among homeowners. If you're considering a new mortgage for the sole purpose of lowering your rate, this is called a rate and term refinance.
Lowering your rate by even a quarter of a percentage point can save tens of thousands of dollars over the lifetime of your loan. When you're looking for the lowest interest rate available, pay close attention to the actual savings you will realize by refinancing. If lowering your interest rate by a quarter or half a percentage point means you will save $100 per month in interest payments, make sure you know how long it will take to recoup the closing costs you will incur when you refinance. The easiest way to determine when your real savings will kick in is done by dividing your closing costs by the monthly savings from the new loan payment. For example, if your closing costs are $3800, it will take 38 months, or a little over 3 years to truly start saving money
Bottom line, if you plan on selling the home before the 3 years is up, refinancing to lower your interest rate is not a good idea. If the $100 per month savings would truly help your financial situation, then you might disregard the time it takes to recoup closing costs.
If you're eyeing a new fence for your property or maybe looking to finally finish that kitchen re-model you've been dreaming of, the first place you might look for the money to complete your project is the equity in your home. A cash out refinance involves paying off your current mortgage with a new one where you increase your loan balance by "cashing out." If you have equity available, a cash out refinance can help you get the money you need quickly.
Cash out refinances carry a slightly higher interest rate than a rate and term refinance. For most people, the trade off for the minimally higher rate is well worth it when a need exists for immediate cash. Depending on the interest rate of your current mortgage, the rate on your new cash out refinance may be lower than your current rate. This can be considered a "win win." You are able to lower your interest rate and get the cash you need to complete your home project, pay off a car loan, or fulfill any need for taking the cash out.
Are credit card bills stacking up? Have you had an unforeseen, expensive financial burden that needs to be paid off? Maybe you have a lingering judgment or tax lien that needs to be satisfied. Debt consolidation might be good for you. Refinancing to consolidate debt has always been a popular means to saving money. If you are paying several creditors high interest rates on the debt you owe, or simply want the convenience of making one payment to pay your debts, rolling all of your debts into your mortgage might be a good idea. For some people, the monthly payment savings is substantial. If you can save $500 a month by paying off your credit card debts with your new debt consolidation mortgage, your financial well being in terms of cash flow can be greatly increased.
A debt consolidation is also considered a cash out refinance so it will carry a slightly higher interest rate than a rate and term refinance. Additionally, as a word of caution, it is very important you come to terms with your own spending habits if you are considering consolidating your debt into a new mortgage. While you might benefit from a healthy amount of monthly savings by paying off your debts in the refinance, it's crucial to have the will power to limit your spending after a consolidation. Many times, a borrower will pay off credit card debt or other installment loans only to charge those credit cards back up or obtain new loans. The end result is a higher mortgage balance from the initial debt consolidation and new debt obligations.
The idea seemed great at the time. You took that low, introductory interest rate on the adjustable rate mortgage. The fixed rate period is up and your interest rate is about to increase! What do you do? Most people either move before the adjustable rate period starts or they refinance into a fixed rate loan.
Adjustable rate mortgages are based on what's called an index and margin. To keep it simple, you can think of the index as a non-changing number that your adjustable rate mortgage is based on. A common index for an adjustable rate mortgage is the 6 month LIBOR index. To compute an adjustable rate mortgage during its adjusting period, you add the index your loan was based off of and add the margin (the premium the lender will collect) to the index. That will give you your adjusted interest rate. Additional terms to the interest rate adjustment amounts and the period of adjustments can be found in your loan documents labeled "Adjustable Rate Note Rider" or something similar. Sometimes adjustable interest rates can decrease after the fixed period based on the above calculations. But for many people, the interest rate goes up thus providing the need to refinance into a stable, fixed rate.
If you want to pay your mortgage off earlier than 30 years, you should consider refinancing into a loan with a shorter term. The shorter terms means your mortgage principal and interest payment will increase, however, the interest savings over the life of the loan is dramatic. During the first years of repayment, more principal is paid towards the loan balance on short term mortgages than standard 30 year mortgages.
Whether you want to pay off your home early before you retire, or just save on interest payments, refinancing your mortgage to shorten the repayment period is a wise financial choice.
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