Facts About Refinancing Your Home
By Sherry Gray, eHow Contributor
In short, refinancing means using a new secured loan to pay off an existing loan on the same property. Under many circumstances, refinancing your home can reduce monthly expenses and result in an improved credit score. Lower interest rates, extended payment time and access to equity are all attractive incentives for refinancing when the market is right, but refinancing is not always the best option. To determine whether refinancing will benefit your financial situation, there are several things to consider.
Lower payments by lowering interest rate
Interests rates, driven by economic forces in the market, are subject to frequent change. The market determines the interest rate at the time of purchase. If the current lowest rate that you can qualify for is significantly lower than your original rate, it may be financially beneficial to refinance. A lower interest rate will not only reduce payments immediately, it can result in huge savings over the life of the loan.
Trade Adjustable Rate for Fixed Rate
Adjustable-rate mortgages (ARM) are an attractive lure when interest rates are low, but homeowners can quickly find themselves in trouble when rates begin to climb. If you plan to stay in your home for an extended time and interest rates are low, refinancing for a low fixed rate is a smart move.
Another consideration is time frame. If a 30-year mortgage can be refinanced at a lower rate to a 10-, 15- or 20-year mortgage, the result will be thousands--possibly even tens of thousands--of interest dollars saved. While the payment might remain the same, the house will be paid off much sooner and equity will build quickly because a bigger percentage of the payment will be paid to the principal.
One compelling reason to refinance when interest rates are low is to cash out all or some of the equity built up in the home. If you have paid on the house for a number of years, borrowing that money back form the lender to pay off high-interest loans, remodel or expand your property, or finance a new business venture could prove to be a smart investment strategy.
Ending Private Mortgage Insurance (PMI)
Private mortgage insurance is often required for houses purchased with less than a 20 percent down payment. Once the equity in the home has accumulated to 20 percent or more and payments have been made in a timely manner, the lender will be willing to drop this insurance on refinance, saving an unnecessary monthly expense.
A home is the biggest investment most people will ever make. Treating it like an investment and carefully managing assets for best financial reward can make home ownership a rewarding component of your financial portfolio. But be aware that refinancing your home can generate fees and taxes that override the benefits of a lower interest rate, so before you sign, get the facts about refinancing your home: consider the market rates and your circumstances, do the math, and make sure that a new mortgage will pay off in the long run.