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Why Refinance a Mortgage?

December 7th, 2009

why-refinance-mortgage.jpgAt a time when interest rates are at record lows, you may want to think about refinancing your current mortgage if you have not done so recently. There are some good reasons to do so; with lower costs, adjustable rates, and zero-down options, the traditional 30-year or 15-year fixed rate loans don’t always allow us to meet our financial goals. Today, even reducing your interest rate by a small amount can add up to a big savings over the life of your home loan. Here are five good reasons for why you might want to refinance a mortgage.

1. You Can Lower Your Monthly Payments

If you plan to live in your home for at least a few years, it may make sense to pay a little more upfront in exchange for decreasing your interest rate and overall payment. Over the long run, you will have paid for the cost of the mortgage refinance with the monthly savings. On the other hand, if you plan on moving in the near future, you may not be in your home long enough to recover the refinancing costs. Therefore, it is a good idea to calculate the break-even point before you decide to refinance so that you can determine whether or not it makes sense.

2. Freedom to Switch From an Adjustable Rate to a Fixed Rate Mortgage

Adjustable rate mortgages (ARMs) can provide lower initial monthly payments for those who are willing to risk upward market adjustments. They’re also ideal if you don’t plan to own your property for more than a few years. However, if you have already made your house a permanent home, you may want to swap your adjustable rate for a 15-, 20- or 30-year fixed rate mortgage. This is an especially important consideration in the current economic climate where interest rates really have nowhere to go except higher. Your rate may be slightly higher than with an ARM, but you have the confidence of knowing what your payment will be every month for the rest of your loan term.

3. Escape From Unfavorable Balloon Payment Programs

As with the adjustable rate mortgage programs, balloon programs are great when you want lower rates and lower initial monthly payments. However, if you still own the property at the end of the fixed rate term (usually 5 or 7 years), the entire balance of your mortgage is due to the lender. If you are in a balloon program, you can easily switch over into a new adjustable rate mortgage or fixed rate mortgage before you wind up having to pay too much all at once.

4. Save Money by Dropping Private Mortgage Insurance

Zero or low down payment options allow homeowners to purchase homes with less than the conventional 20% of the loan balance. Unfortunately, they also usually require private mortgage insurance, which is designed to protect the lender from loan default. As the value of your home increases and the balance on your home decreases, you may be eligible to remove this annoying insurance expense with a mortgage refinance loan.

5. Use Your Home’s Equity for Ready Cash

Your home is a great resource for extra cash. Like most homes, there is a good chance that yours has increased in value, which gives you the ability to take some of that cash and put it to good use. You can pay off credit cards, make home improvements, pay tuition, replace your current car, or even take a long-overdue vacation. With a cash-out mortgage refinance transaction, it’s easy. According to the current rules in the USA, it’s also tax deductible.

This article on refinancing a mortgage was originally purchased under a PLR agreement from a supplier at the DigitalPoint forums.

2 Responses to “Why Refinance a Mortgage?”

  1. comment number 1 by: tooth whitening

    Depends on what your current rate is on you mortgage, your current FICO score, Debt/Income Ratio and your current LTV (Loan to Value on your house: it is the percentage you owe mortager for your house still and how much its current valuation is). If your FICO is good and your LTV is less that 85% and your mortgage rate is higher than current prime rate it may be worth checking into.

    Also it depends on why you are refinancing. For a lower payment? Or to take money out of your home?

    Lower payment: you need to maker sure that your new financing closing costs and all loan associated fees are taken into account when refinancing. Will your payment still be lower? Will the loan timeframe on your house be extended? You don’t want to end up with 10 extra years to pay for just $50 off each month.

    Taking Money: Additionally, you may want to shop wisely before taking money out of your home. It is why so many people ended up in the current foreclosure crisis. Be critical of the reason you are taking money out of the house and the risks associated with that choice.

    I suggest seeking out a broker and/or financial advisor if serious..
    I work in banking and use to be a home equity loan documentation specialist

  2. comment number 2 by: fitness studios

    I want to refinance my home, but my broker tells me that the minimum fico score is constantly changing, so I want to exactly know what is the minimum score to do a stated refinance mortgage deal right now? thanks..

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