Homeowners often refinance a mortgage by paying off an existing loan in order to replace it with a new one. Many reasons call for a mortgage refinance, such as obtaining a lower interest rate or the opportunity to shorten mortgage payment term.
Here are the five common reasons to help you learn when it is well-justified to go for a mortgage refinance:
Securing a Lower Interest Rate
It is suitable to go for a mortgage refinance when you need to lower the interest rate on your existing loan. A basic rule of thumb implies that if if you can lower the interest rate by at least 2 percent, you should opt to refinance your mortgage. However, today it’s a lender’s adage that savings of up to 1 percent only is enough of an incentive to refinance. Reducing your interest rate can help you in two ways – it saves you money and increases the rates at which you build equity in your home, thereby reducing your monthly payment.
Shortening the Loan’s Term
When interest rates are lowered, homeowners often have a chance to replace an existing loan with another one with a shorter term, without any significant impact on monthly payments. For example, refinancing from 9% to $5.5% for a 30-year fixed rate mortgage on a $100,000 home, cuts down the mortgage in half, meaning 15 years to pay back with just a small change in monthly payments; i.e. from $804.62 to $817.08.
Converting Between ARMs and FRMs
While Adjustable Rate Mortgages start out by offering lower rates as compared to fixed rate mortgages, recurring adjustments are likely to result in rate increases which are significantly higher than the rate offered by fixed rate mortgage. Under these circumstances, it is always appropriate to convert to a fixed rate mortgage in order to have lower interest rates.
Tapping into Equity and Consolidating Debt
Equity is often accessed by homeowners to cover major expenses like home renovation costs or financing their children’s education. These homeowners are in a good position to take advantage of mortgage refinancing because home renovation effectively boosts property value and the fact that interest rate on the mortgage loan is significantly lower than the interest rate on money borrowed from an external source.
Managing Your Credit
Achieve better credit scores is also a great reason to opt for a mortgage refinance. When a homeowner’s credit score gets better due to timely mortgage payments, he/she is able to avail better loan options with lower interest rates. For more information and help on mortgage refinancing, get in touch with a company like meilleur taux hypothécaire Montreal.
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