All About Refinancing a Mortgage
We are still in a period of lower interest rates yet many homeowners are not able to sell their homes. Unfortunately more and more homeowners are becoming victims of foreclosure. Refinancing has become more difficult for many. Still the question should I refinance? is a quest in the minds of many and yes it may just be the answer to your crisis or a blessing that frees up a large monthly expenditure.
So what is refinancing and why do people refinance their current mortgages?
To refinance is to “re-do” your current mortgage. Whether or not to refinance your current mortgage is really dependent on the homeowner’s personal and/or financial situation. And, the reasons they give for refinancing are as varied as these situations. Some of the most common reasons are:
Current interest rates are too high. By refinancing you can get a better rate and by so doing you are able to lower your monthly mortgage payment. But this also depends on the terms of the loan and how long you intend to keep the property before selling it. If you are going for the long term it would be wise to refinance, otherwise be patient and wait for a time when interest rates are much lower. Remember the closing costs you have to pay when get a new loan – they play a part in the equation.
Shorten or lengthen the term of the mortgage… The most common term for a mortgage is 30 years. However, there are also mortgages for 15, 25, 30, 40 and 50 years. By refinancing you can reduce the length of your mortgage to the time limit you think you can afford to make timely mortgage payment, e.g., from 30 years to 15 years. This way you also reduce the amount of interest you would have paid if the mortgage went to its full term of 30 years.
Take equity out of your home… Depending on your down payment, after paying mortgage for at least five years, you often start to build up equity in your home. Unfortunately in today’s market that is not as true as it was a few short years ago. Equity is the difference between the appraised value, what your home can be sold for, and the amount you currently owe on your home. Also if property values have increased since you bought your home you could have a few thousand dollars to take out to do whatever you please – pay off other high interest credit card loans though you must have the discipline not to max those cards out once again. You may even be in a position to take that long overdue vacation – without worrying about taxes (please consult your tax attorney).
Convert from that adjustable rate mortgage… Another reason for refinancing might be to convert from your adjustable rate mortgage to a fixed rate mortgage thereby ending the uncertainty an adjustable rate mortgage carries. When in a period of high fixed rate mortgages the opposite may be true and you will find yourself considering the switch to combination’s fixed and ARM.
Improve your credit ratings… One main reason that homeowners refinance is to achieve a better future credit score rating. If you have derogatory credit information on your credit report – delinquencies, bankruptcy, late payments, judgments and/or liens on your property – the credit reporting bureaus will give you poor credit scores. Refinancing might be the only option you may have to payoff your debts, clean up your credit ratings and start your life all over.
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