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 Mortgage refinancing refers to the replacement of an existing debt obligation with another loan obligation under various conditions

mortgage refinancing

There are several reasons for homeowners refinancing:

(a) To get a lower interest rate

(b) o shorten their mortgage term

(c) To convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa

(d) To tap into home equity to raise money to deal with a financial emergency, finance large purchases, or consolidate debt.


Since refinancing can cost between 2% to 5% of the principal of a loan and as an original mortgage - an appraisal, title search, and application fee are required, it is important for the homeowner to determine that the refinance Whether or not is a wise financial decision.


key takeaways:


(i) Getting a mortgage with a low-interest rate is one of the best reasons to refinance.

(ii) When interest rates fall, consider refinancing to reduce the duration of your mortgage and pay significantly less in interest payments.

(iii) Switching to a fixed-rate mortgage - or an adjustable-rate one - depends on the rates and how long you can plan to stay in your current home.

(iv) There are other reasons for tapping equity or refinancing debt - but beware, doing so can sometimes exacerbate debt problems.


Refinance to secure a lower interest rate


One of the best reasons to refinance is to lower the interest rate on your existing loan.  Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%.  However, many lenders state that 1% of savings is sufficient for incentives to refinance.


Lowering your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home, and it can reduce the size of your monthly payment.  For example, a 30-year fixed-rate mortgage with an interest rate of 5.5% on a $ 100,000 home has a principal and interest payment of $ 568.  A similar loan at 4.1% reduces your payment by $ 477.


Refinance to reduce the loan term


When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan for another loan, which is of considerably shorter duration, without much change in monthly payments.


For a 30-year fixed-rate mortgage on a $ 100,000 home, refinancing from 9% to 5.5% can cut it from $ 15 to $ 15 with a slight change in monthly payments from $ 805 to $ 817.  is.  However, if you're at 5.5% for 30 years ($ 568), pledging 3.5% for 15 years will reduce your payment to $ 715.  So do the math and see what works.


Refinance to convert to ARM or fixed-rate mortgage


While ARMs often begin to offer lower rates than fixed-rate mortgages, periodic adjustments can increase rates that exceed the rate available through a fixed-rate mortgage.  When this happens, the fixed-rate mortgage converts to results.  Eliminates anxiety over low-interest rates and future interest rate hikes.


Conversely, converting from a fixed-rate loan to ARM - which often has a lower monthly payment than a fixed-term mortgage - can be a sound financial strategy if interest rates are falling, especially for those homeowners  For those who do not play for their living.  Home for more than a few years.


These homeowners can reduce their loan interest rate and monthly payments, but they won't have to worry about how the higher rate will last 30 years in the future.


If rates continue to fall, the periodic rate adjustment on ARM eliminates declining rates and small monthly mortgage payments, necessitating a rate drop each time.  With the rise in mortgage interest rates, on the other hand, it will be a mindless strategy.


Refinance to tap equity or consolidated debt


While the reasons mentioned earlier for refinancing are all financially strong, mortgage refinancing can be a slippery slope for a never-ending loan.


Homeowners often use the equity in their homes to cover large expenses, such as home remodeling or the cost of a child's college education. These homeowners can justify refinancing to the fact that the remodeling adds value to the home or that the interest rate on the mortgage loan is lower than the amount borrowed from another source.


Another justification is that the interest on the mortgage is tax-deductible. While these arguments may be correct, increasing the number of years outstanding on your mortgage is rarely a smart financial decision nor does spending a dollar to get an interest 30-cent tax cut. Also note that since the Tax Cut and Jobs Act came into force, the size of the loan on which you can deduct interest has been reduced from $ 1 million to $ 750,000 if you purchased your home after December 15, 2017.4.


Many homeowners refinance to consolidate their debt. At face value, it is a good idea to replace a high-interest loan with a low-interest mortgage. Unfortunately, refinancing does not bring automatic financial discretion. Take this step only if you are confident that you can resist the temptation to bear the expense of refinancing once.


It takes years to refinance a 3% to 6% principal, which reduces costs, so don't do this unless you plan to live in your current home for more than a few years.


It is known that a large percentage of people who once generated high-interest loans on credit cards, cars, and other purchases give them the credit available to do so again after a mortgage refinance. This creates a quick quadruple loss made up of wasted fees on refinancing, lost equity in the home, additional years of increased interest payments on new mortgages, and a return to high-interest debt when credit cards are maximized again. The result is an endless sequence of debt cycles and eventual bankruptcy.


Another reason for refinancing can be a severe financial emergency. If so, carefully research all your options for raising funds before taking this step. If you refinance cash-out, you may be charged a higher interest rate on a new mortgage than a refinance rate, in which you do not charge money.


Bottom-line


Refinancing can be a great financial step if it reduces your mortgage payments, shortens your loan term, or helps you build equity more quickly. When used carefully, it can also be a valuable tool to bring debt under control. Before you refinance, consider your financial situation carefully and ask yourself: How long can I continue living in the house? How much money will I save by refinancing?


Again, keep in mind that refinance is 2% to 5% of the loan principal. It takes years to reduce costs with savings arising from low-interest rates or short periods. Therefore, if you are not planning to stay in the home for more than a few years, the cost of refinancing can negate any potential savings.


It also wants to remember that a savvy homeowner is always looking for ways to reduce debt, build equity, save money, and eliminate their mortgage payments. Taking cash out of your equity when you refinance does not help in achieving any of those goals.

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