Tips on Refinancing Your Home
According to the LendingTree, a leading online lending and realty services exchange, the average American refinances his or her mortgage every four years, because paying off a present mortgage and taking out a new one can translate into big savings over time. It’s important to make sure that your current mortgage is still the best loan for you. Here are five tips that can help you figure that out:
1. Changes in Financial Situation - Has your financial situation changed since you took out your mortgage? If a change in your financial situation has made it possible for you to afford higher monthly payments, you may want to refinance your mortgage with a shorter term. The higher payments will enable you to pay off your home more quickly and save substantially on long-term interest charges. Alternatively, you can opt not to refinance and simply pay more towards your principal each month. Also , if you were required to take out private mortgage insurance (PMI) when you bought your home because your down payment was less than 20 percent of the purchase price, you may be able to cancel PMI if your equity has grown to more than 20 percent of the value of your home. On the opposite side of the spectrum, if your financial situation has worsened and you are having trouble making your mortgage payments, refinancing for a longer term can lower the amount you have to pay each month. You'll end up paying more in interest charges, but freeing up the cash might help you avoid costly credit card debt.
2. Adjustable Rate Mortgages – Many borrowers who took out adjustable rate mortgages (ARM) in the past few years are now facing a jump in payments as their mortgages reset for the first time. If your payment is set to increase, consider refinancing your ARM with a different loan product, such as a fixed-rate loan (if you plan to stay in your home another 7 or 10 years, and you expect rates to stay the same or increase) or a hybrid ARM (if instead you plan to stay in your home just 5 to 7 years, and expect rates to fall). You can also look into negotiating to improve the features of your current ARM.
3. Large Purchases – If you are confronted with a big purchase or major expense, such as a car or education, and if you've built up equity in your home, you can turn some of that equity into cash. Borrowing against your home is generally cheaper than using credit cards or unsecured consumer loans because they carry lower interest rates. In addition, the interest on the loans may be tax deductible. There are two ways to do it: cash-out refinancing and a home equity loan. The advantage of using cash-out refinancing is that your new mortgage payment may be lower than the combined payments of a separate home equity loan and first mortgage. But, the up-front costs associated with cash-out refinancing can negate any savings over a home equity loan, so make sure to investigate both options.
4. Interest Rates - Are interest rates lower now than when you took out your current mortgage? If you took out a fixed-rate mortgage several years ago and interest rates have since dropped, refinancing may lower your payments considerably.
5. Making a Move? - If you are thinking about moving, it’s a good time to review your mortgage. Knowing how much principal is left on your loan can help you determine how much equity you have, which you can use as a down payment on a new home.