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The Best Reasons to Refinance

July 2, 2012

This is part one of a three part series on refinancing. Parts two and three will be linked at the end of this article when they are published.

Interest rates have fallen again and many people are considering refinancing their homes. Before refinancing it’s important that you understand all that refinancing involves, especially since the process is similar to what you went through when you purchased your home. That’s because when you refinance you pay off your existing mortgage and start a new one. Here are some of the most common and best reasons for refinancing.

One of the best reasons to refinance your mortgage is an improved credit score. A better credit score means you may be able to get a lower rate. Your mortgage interest rate directly impacts your monthly payment. With a lower interest rate you can build equity in your home more quickly. For example, let’s say you’re interested in refinancing your existing mortgage which is a 30-year fixed-rate loan of $200,000 at 6.0% with a monthly payment of $1,199. Refinancing with a 30-year fixed rate loan of $200,000 at 5.5% would make your monthly payment $1,136, a savings of $756 over a year’s time and $7,560 over 10 years.

Another reason to refinance is to adjust the length of your mortgage. You can put more cash in your pocket by lengthening the term of your mortgage. But in doing so, you’ll lengthen the time of your mortgage and pay more in interest. On the other hand, if you decrease the term of your mortgage, you’ll pay off your loan sooner but your monthly payments will be higher because you’ll be paying more of the principal every month. For example, let’s compare a fixed-rate loan of $200,000 at 6% for 30 years to a fixed-rate loan at 5.5% for 15 years. On the 30-year loan at 6% your monthly payment is $1,199 with $231,640 total interest paid while the 15-year loan at 5.5% has a monthly payment of $1,634 with $94,120 total interest paid. As you can see by this example, you could decrease the term of your existing mortgage by paying a little extra on principal each month. In fact, paying an extra $50 each month on the 30-year loan reduces the term by 3 years and $27,000 in interest.

A third reason why many people are refinancing their home mortgages is because they would rather have a fixed-rate mortgage than an adjustable-rate mortgage. With an adjustable rate mortgage your mortgage payments could go up as interest rates change. But with a fixed-rate mortgage homeowners have the peace of mind that comes with having a steady interest rate and monthly payment.

Finally, another reason to refinance is to get cash out from the equity you’ve built up in your home. The dollar-value difference between the remaining balance on your mortgage and your home’s value is your equity. Refinancing your home for an amount that’s greater than what you owe on your home is called cash-out refinancing. Many homeowners are taking advantage of this in order to finance home improvements, pay for their children’s college educations or to pay for medical bills. Homeowners who are unable to qualify for cash-out refinancing are opting to do home equity loans or Home Equity Lines of Credit instead. Either way, a Homestead Financial Mortgage Loan Officer can answer any questions you have about financing and re-financing your home.

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- Jayson Hardie on Growth

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