Whenever rates are low, many borrowers will find
that refinancing to lower interest rates makes financial sense. When
you refinance, you are getting a new mortgage by first paying off the
old one and then replacing it with a new one with a lower interest
rate. This move can lower your monthly payment and the overall interest
bill. You may also change the term of the loan to a shorter one thus
paying off the loan earlier and saving on interest. By changing the
term of the loan from, say 30-years to 15-years, you can build up
equity more quickly on your home and cut the interest paid on the loan
substantially.
You may also refinance to get additional cash you need. You can do this
by going through what is known as
"cash out
refinancing". Consumers get the difference
between the loan balance and the new one at closing to spend as they
see fit. Rather than to get a separate equity loan, some borrowers
choose to just refinance their first mortgage and take the cash out at
closing to spend. Yet refinancing mortgage may not be suitable for
everyone. If you are 20 years into a 30-year mortgage, it may not make
sense to refinance to a new 30-year mortgage. This would mean you would
be paying off the home for a total of 50 years. A consumer with poor
credit history may not qualify for good rates so refinancing could
actually increase your monthly payments.
It is important to remember that when you refinance, the
mortgage lender may charge a loan origination fee, which may be 1% of
the loan amount. Also, any points paid in refinancing cannot be
deducted from taxes in the year of refinancing as the amount is
amortized over the life of the loan.
All in all, when you have built up some equity in your home, you do
have options and can cash in on this money whether you refinance or
obtain a home equity loan.
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