Top Four Reasons for Refinancing |
By Peter Chrulski |
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Many people think about refinancing their homes. They ask themselves, “Should I switch to a fixed rate??or, “Is it really worth the money I’m going to save each month??Ultimately, it is up to homeowners to determine whether or not the refinance is a financially sound decision.
1) Switching from a Fixed-Rate Mortgage to an Adjustable Rate Mortgage (ARM)
The most important factor here is how long homeowners plan to live in their homes. Are they planning on moving in a few years? If homeowners plan on moving pretty quickly, it wouldn’t make sense to pay higher interest rates with a 30-year fixed rate mortgage. The best suggestion for homeowners would be refinancing to an ARM while interests are low, because they’ll receive a competitive rate and a lower mortgage payments before they move.
2) Reduce Mortgage Payments
Even the slightest change in interest rates can significantly lower mortgage payments. Staying with a high interest rate when lower rates are available is never a sound financial decision. There’s no reason for homeowners to pay more monthly, when they could be paying lower payments. There are a couple of ways for homeowners to lower their monthly payments.
The easiest choice is refinancing to a lower rate. Lower rates generally mean lower payments.
Interest-only loans are also a good choice. With an interest-only loan, the minimum monthly payment for mortgages is the interest itself. Homeowners can choose how much and when they want to pay on their principal balance. If they’re in a bind that month and can’t afford an entire mortgage payment, they can simply pay the interest that month. They can also set money aside that would have normally gone to their mortgage for investments or a new car.
Homeowners can also change the term of their loan. Changing the term of a mortgage can significantly raise or lower a monthly payment. For instance, the payments could rise substantially on a 30-year mortgage that’s refinanced to a 15-year mortgage. At the same time, though, the loan would be paid of in half the time. On the contrary, by refinancing a 15-year mortgage to a 30-year mortgage, payments could drastically go down, but the house would be financed much longer.
3) Liquidating Equity
Every time a mortgage payment is paid, a little piece of the loan is paid off. Over the years this adds up to a great sum of money, and it’s called equity. When homeowners refinance for the full value of their home, they can receive the home equity in one lump sum. They can use this extra money to pay for retirement or remodeling.
4) Consolidating Bills
Many homeowners use the equity in their home to consolidate credit card bills. The interest paid on mortgages is tax deductible, and is considerably lower then the interest on most credit cards. Many people also use their home equity to consolidate expensive purchases like new cars, boats, education, and retirement.
Every situation is different when it comes to refinancing. The length of time the home will be occupied, what the home equity will be used for, and whether or not interest rates are soaring are all considerations for refinancing. |
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