In many ways, your house is like a savings account. If you have discipline and knowledge regarding the benefits of refinancing, you can tap into its equity for years to come. There are many reasons you might want to refinance and most people fit into one (or more) of the basic categories.
Convert an Adjustable Rate to a Fixed Rate Adjustable rate loans typically offer a lower interest rate than fixed rate loans because they shift the interest rate risk from the lender to the borrower. Interest rate risk can be quite substantial and should not be underestimated. In the 1980's interest rates on mortgages were over 10% and it was not uncommon to have a 13 or 15% rate. In 1981 the 30 year fixed rate mortgage rate ranged between 15% and 20%. Basically, when rates are historically low it is best to lock in a low fixed rate for the term of the loan.
Consolidate Debts to Save Money and Cash Flow Mortgages typically have the lowest interest rates and are tax deductible. Credit cards and Installment loans typically have higher interest rates and terms that are significantly shorter than mortgages. If you have equity in your house you can obtain a new mortgage to consolidate debts and save money. By obtaining a lower and tax deductible interest rate and by extending the term you save money and cash flow. By extending the term of your mortgage you still have the option to make larger payments on the mortgage which pays off the principal quicker.
Get Cash Out for Home Improvements This is a great way to use the equity in your home to increase the value and you get to enjoy the improvements.
Get Cash Out to Settle a Divorce Use the equity in your home to settle with your spouse, payoff joint debts and move forward with your life.
Lower Monthly Payments Lower monthly payments can be achieved by:
- Obtaining a lower interest rate
- Taking a longer term
- Selecting a interest only feature
- Selecting a negative amortization feature
- PMI Removal
- Paying down the balance on an adjustable rate or interest only mortgage
Lower Interest Rate to Save Money The traditional refinance "rule of thumb" -- that you must get an interest rate at least 2% below your current interest rate -- is often incorrect. The correct approach is to divide the closing costs by the monthly payment savings (due to the lower interest rate) and the result is the number of months it will take to break even on the refinance.
Shorter Term and Lower Interest Rate to Save Money The most effective way to save money on a mortgage is to lower the term and rate. The payments may be significantly higher although the interest savings over the life of the loan is quite substantial. In addition, a 15 year term typically has a 1/2% lower interest rate than a 30 year term.
Refinance Basic Steps:
1. Mortgage Pre-Approval
2. Mortgage Application
3. Appraisal
4. Underwriting
5. Closing
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