Refinancing is the process of replacing an existing loan with a new loan, different terms.
The new loan pays off the current debt. Debt is not eliminated when you refinance but replaced by a loan with better terms/features to improve your finances. Refinancing is done to allow a borrower to obtain a better interest term and rate.
Why do people Refinance?
Don’t like your interest rate? Refinance for a lower rate! After owning a home for a few years and building up equity, you may be able to refinance at a lower interest rate. Reducing interest not only helps save money, it also increases the rate at which you build equity in your home.
When interest rates fall, homeowners often have the opportunity to refinance an existing loan for another without much change in the monthly payment. Yes, one can make extra payments to the principal but what about writing off the mortgage interest during tax season? The higher the interest, the higher the return.
Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child’s college education. These homeowners may justify by pointing out remodeling adds value to the home. Another thought is that of the interest rate on the mortgage is less than the rate on money borrowed from another source.
Convert from Adjustable to a Fixed Interest Rate
While ARMs often start out offering lower rates than fixed-rate mortgages, periodic adjustments often result in rate increases. Conversely, converting from a fixed-rate loan to an ARM can also be a sound financial strategy, particularly in a falling interest rate environment. If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments. When to consider an ARM? For those only planning on staying in a home for a few years, the ARM may be the best tool for you.
Note: The thing to watch out for is excessive closing costs. Know how long you plan to stay in the home and if refinancing your current loan is worth the closing costs.
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly.