Refinancing an existing mortgage is when the original loan is replaced with a new one.
You might be wondering what the advantages of refinancing are, or when the right time is for you to refinance your home mortgage. A refinanced mortgage will always provide a tangible net benefit to the applicant. People do it to lock in a lower interest rate, consolidate debt, shorten the mortgage term, or change from an adjustable-rate ARM to a fixed-rate. Refinancing is also used to tap into the built-up equity a person has in their property to get cash. This cash is often used for home improvement.
Refinancing into a lower interest rate
If you can get an interest rate of at least 1% lower than the original rate, consider refinancing. This will allow you to obtain equity in your home quicker and decrease your monthly payment.
When interest rates fall, you can refinance your mortgage and get a comparable monthly payment to the one you have now while reducing the term. Reducing your term means you’ll be able to save that much in interest. For example, if you have a 30-year, $100,000 mortgage with a fixed rate of 8%, your monthly payment is $733.76. If you refinance to a fixed rate of 4%, you can cut the life of the loan in half and wind up having a monthly payment of $739.68.
Adjustable-rate to fixed-rate mortgage
While you likely chose an adjustable-rate mortgage (ARM) because of its lower rates initially, you are aware that in the future rates could increase to a point where you are paying a lot more than you would like to. Therefore, changing from an adjustable-rate to a fixed-rate loan will allow you to disregard future hikes in interest rates and keep a steady rate for the remainder of the loan.
If you’re noticing a substantial difference in adjustable-rate mortgages versus fixed-rates, and you’re planning on staying in your house for a short time, you can refinance to an ARM from your fixed-rate to greatly reduce your monthly payment. This can be particularly prudent if you don’t plan on residing in your house long enough to see interest rates eventually start to rise.
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