A typical mortgage runs for 30 years, but not too many American stick to their loans for long. In fact, according to the Mortgage Bankers Association (MBA), an average American homeowner refinances his or her loan every four years. That’s because paying the existing loan and taking a new one can mean lots of savings over the course of time. Nonetheless, refinancing your mortgage has a price and can be a costly move if short term goal is desired. Thus, it is crucial to know exactly the reason why you should refinance.
To switch from ARM to FRM – Mortgage companies may offer adjustable rate mortgages with fixed rate mortgage for the first few years of the loan. Meaning, if you have applied for a loan under ARM, the amount of your monthly dues is fixed during the first years (the number of years depends on the agreement).
Often, the rates are really low which make it more attractive. However, once the “FRM period” expires, fluctuating rates may prove to be stressful and disadvantageous. If you have initially taken an adjustable rate mortgage and would like to switch to a 15-, 20- or 30-year FRM, you may pay higher interest but gain the confidence of knowing what your actual payments would be every month for the rest of your loan.
To get emergency cash – Your home is your asset. And any amount of equity you have built over the years is like money stored in your savings account. Through mortgage refinancing, you can tap these savings and get the cash to finance any immediate need. The cash from your home can be used to pay for college tuition, pay off credit card bills, consolidate debt, take a vacation, replace your current car or increase the market value of your home through home improvements.
To get lower rate – While other factors such as your credit score and your down payment for the house influence the monthly mortgage payment, interest rate is still the single, most important factor that drives your monthly payment to either go up or down. Interest rates though are dictated by market forces. For this reason, rates fluctuate. And if the Federal Reserve cuts on rates, the prevailing rate at the time you bought your house may be significantly higher than what is being offered at the moment. At this point, it is wise to refinance your home. Taking a new loan with a lower rate will mean lower monthly payment.
To reduce monthly payment – Aside from taking a loan with lower rates to reduce monthly payment, extending your loan for another several years would mean lower monthly payment. This, of course, equates to you paying a significantly higher total amount of loan over the same property, but if you are willing to stay in your home forever, this may be a good move.
To pay down the mortgage quickly – Sure, your monthly payment will go up, but you will definitely save on interest rates. Taking a new, shorter loan definitely builds your equity faster which will let you own your property in shorter years.
Refinancing your mortgage is a bold move. Not only will you put your house on the line, you will also place your financial standing on a shaky ground. It is not enough to have a concrete reason alone, make sure that you also have a permanent source of income to pay your mortgage before making any action.