A typical mortgage runs for 30 years, but not too many American stick to their loans for long. The Mortgage Bankers Association indicates that the average homeowner refinances every four years. That’s because paying off the existing loan and taking a new one can mean lots of savings over the course of time. But, if you don’t think long term, refinancing can be a costly mistake. So, it’s important to understand the motivation you have for refinancing.
Here are some suggestions as you why you may want to refinancee your current home mortgage.
Changing from Adjustable to Fixed Mortgage Rate – Home buyers are often attracted to an adjustable rate mortgage with an initially low rate. Low initial rates are great for people who expect their incomes to grow so they can afford the increases in mortgage payments a few years down the line.
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.
Get Cash for Unexpected Expenses – 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. There are many reasons you may need this extra cash. You may need to pay college expenses, pay off high interest credit card debt or consolidate debts. You may need money for car repairs or to get another car. Or you may need to do some home improvements.
To Get a Lower Rate – When interest rates fall you will have the opportunity to get a lower rate for your new mortgage. Global markets determine, to a large extent, the interest rates. Changes in interest rates often reflect the confidence other nations have in the dollar. And if the Federal Reserve cuts rates, the prevailing rate at the time you bought your house may be significantly higher than what is being offered at the moment. When you see mortgage rates drop, it’s a good signal that you can confidently refinance your home. By refinancing with a lower interest rate you’ll be able to reduce your monthly payments..
Improving your credit score helps. The interest rates available to you are also a function of your credit rating. If your credit score has improved since you purchased your home it is likely that you can qualify for a lower interest rate. The higher your credit score, the more trustworthy you become in the eyes of lenders. So, if you have improved your credit standing and elevated your credit score, now might be a good time to refinance.
Lengthening Your Loan Period Reduces Your Payments – If you have, say, 25 years left on your loan, a new 30 year mortgage will allow you to pay less per month. Extending the term of your loan means that you’ll be paying more, overall, for your home. But, if you plan on staying in your home, this may be helpful to you.
Reduce the Term of Your Loan to Pay it Off Faster – By reducing the term of your loan your monthly payments will increase, but you’ll pay off your loan quicker and pay less interest overall. Refinancing to shorten your loan will help you build equity in your home quicker.
It often takes a brave person to alter the terms of their mortgage loan. As you take this step to refinance, both your home and your financial status are at stake. It is not enough to have a valid reason alone, make sure that you also have a permanent source of income to pay your mortgage before taking this step.
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