Reasons to Refinance your Mortgage

With the record low mortgage interest rates available today, many homeowners are looking seriously at refinancing their mortgage. Some are looking to reduce the monthly payments, others are reducing the term of their loan and some taking out equity built up to pay off other debt. All of these reasons make sense if the savings and costs associated with refinancing work out to be a benefit.

Keep in mind when contacting your lender – Refinance is a priviledge, not a right.  You currently have a mortgage (a contract to pay back money lent) with your lender.  When you refinance you are initiating a new mortgage (a new contract) which has nothing to do with the previous mortgage.  Many borrowers are shocked to find that they need to qualify for the refinance.  They think that their lender will just be changing the term, rate and payments on their existing loan.

Loan qualification must be done based on your financial situation today.  It will be done on the value of your home today.  You will need to provide complete income and asset documents for verification by the lender. 

Lowering Monthly Payments. This seems like a no-brainer, but you need to consider the pros and cons and how they fit your particular situation. The pros include lowering your monthly payments due to a lower interest rate. Also, when you refinance, your loan amount often is reduced ias you have been paying on the principal of your existing for several years. You may have taken out a 200,000 loan six years ago and now the principal balance is $192,000. The payments on the new loan will be based on $192,000, a savings right there. 

The disadvantages to consider are that you will be starting the clock over from the beginning. If you refinance a 30 year mortgage that you have been paying for six years, the new loan starts over at 30 years.  Also, this is a new mortgage and you will pay many of the same costs you paid when you bought the home.  Lender fees will include an appraisal, a processing fee, flood certification and any fees you choose that reduce the rate even lower, such as discount points.  You will also be required to pay for a title search, lenders title policy, closing/settlement fees and other third party fees such as recording fees and any mortgage registration fees or taxes your state requires.

Reducing the Term. With such low interest rates available to most borrowers, it can make sound economic sense to pay off your higher interest 30 year loan and take out a lower interest 15 or 20 year loan. Your monthly payments will not reduce as much, but you will be paying off the loan much earlier and saving on the total interest paid on the loan.  For people looking to retire in 15 or 20 years, this is most definitely an option to consider. Weigh the advantage of a shorter term with the costs to obtain a new loan.

Using Equity to Pay Off Debt. If you are fortunate enough to have built up some equity in your home, you may consider refinancing at a higher loan amount and use the equity to pay off other debt such as a home improvement loan, high interest car loans or even pay for your children’s college tuition so they are not strapped with student loans. 

If you are considering refinancing, be sure to weigh the costs involved against the benefits.