There are many reasons why homeowners decide to refinance their homes and there are many ways they can benefit from refinancing existing mortgages. Because there are often misunderstandings about refinancing, it is important to first explain that refinancing is actually closing out a mortgage and financing your home with a new loan. With this being said, keep in mind that refinancing a home can be a lot of work and could also involve the same cost as when you first took out your mortgage. On the other hand, refinancing can result in significant savings depending on the circumstances and reasons involved. Your decision to refinance or not will ultimately depend on your particular circumstances.
The following are some of the most common reasons why people choose to refinance their homes.
1. Lower Payments. When interest rates fall below your current mortgage interest rates you may want to consider refinancing to lower your payments. Although there are costs involved, if you plan to stay in the home for a long time then the reduced monthly payments will likely offset the costs associated with the refinancing.
2. Reducing the Term of your Loan. Some people decide to refinance their home at a shorter term in order to reduce the overall costs of the loan. For example, if their current loan is for 30 years at a fixed rate of 8.00% and they refinance for 15 years at a 7.00% interest rate the savings could be thousands of dollars over the life of the loan even though the monthly payment amount may not change that much.
3. Converting Equity into Cash. Another reason why some decide to refinance their homes is to convert equity into cash. This cash is often used to do home improvements which will increase the value of the home.
4. To Consolidate debt. A common reason for refinancing is to finance a higher loan balance and use the cash difference to pay off credit cards, auto loans, and other debts.
5. To Convert an Adjustable Rate Mortgage to a Fixed Rate mortgage. When interest rates are low, it might be a good time to convert an adjustable rate mortgage to a more stable fixed rate loan which will likely save the borrower money over time.
Deciding on whether to refinance your current mortgage will depend on many factors including the current interest rates, your reasons for refinancing, how long you plan to stay in the home, your current loan features, and your goals for mortgage refinancing.
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