The Fundamentals of Refinancing Your Mortgage

When you refinance a mortgage you repay one loan by taking out another. According to the Mortgage Bankers Association, the average American refinances his/her mortgage every four years. If you have a 20 or 30 year term then paying off the present mortgage you have to take out a new one can translate into tremendous savings in many cases. In the short-term however it may cost you more. It is important that you carefully weigh both sides before you make the decision to refinance. Here we examine the fundamentals of refinancing your mortgage.   

 

Why is refinancing a mortgage something you should consider doing? For many people refinancing is all about getting a better interest rate. If you took out a mortgage that had a fixed interest rate a number of years ago and interest rates have since gone down then this may be an excellent time to refinance your mortgage because it can lower your payments tremendously. 

 

Refinancing makes it possible for you to switch to an adjustable rate mortgage (ARM) or a fixed rate mortgage. An adjustable rate mortgage fluctuates with the markets but can offer you a lower interest rate early on. On the other hand, when rates start to climb it might work in your best interests to lock your mortgage in at a fixed interest rate that will provide you with monthly payments that are consistent.  

 

Refinancing a mortgage with an adjustable rate can improve the features of it. Adjustable rate mortgages come with protective caps that limit the amount your payments can be increased annually as well as over the entire life of the loan. If you are not happy with the cap on yours then you can negotiate the features by way of refinancing. 

 

Many homeowners want to build equity in their homes as quickly as they possibly can. If your financial circumstances have made it such that you are able to increase your monthly mortgage payments then it would be wise to refinance your mortgage with a term that is shorter. On the other hand you may wish to put more money towards the principal every month to pay down your mortgage faster. Only the most disciplined money managers should consider doing this however!

 

Refinancing your mortgage may also provide a viable means of reducing your monthly mortgage payments. When you refinance over a longer duration of time you will be able to decrease the amount of money you pay on a monthly basis. The downside to this is that you will pay more in interest charges over the full term of your mortgage. However if you have run into some financial difficulties this is a technique that can lessen the stress you are experiencing.

 

Some individuals like the idea of refinancing because it makes it possible for them to turn the equity in their homes into cash. For example you may decide to take out a new home loan with a principal that is larger. What this accomplishes is it takes some of the equity you have built up in your home and turns it into cold hard cash that you can then use for a big purchase. This is referred to as “cash-out refinancing.” You need to learn more about the pros and cons of doing this before you decide it is right for you. 

 

Trying to decide whether mortgage refinancing is right for you can be tricky. You need to consider how long you plan to reside in the house in question. You also need to determine what a new mortgage will cost you and what the prepayment penalty will be on your present mortgage. Once you have looked at all sides of the issue you will then be in the best position possible to do what is best for yourself.