Mortgage Refinancing Basics

Mortgage Refinancing Basics
Your mortgage may have a​ 30-year term,​ but not many homeowners stay with the​ same loan for that long .​
In fact,​ the​ average American refinances his or​ her mortgage every four years,​ according to​ the​ Mortgage Bankers Association .​
That’s because paying off your present mortgage and taking out a​ new one can mean big savings over several years .​
However,​ refinancing comes with a​ price in​ the​ short term,​ so it’s important to​ consider both the​ costs and benefits before making your decision.
Why refinance?
Here are some reasons to​ consider refinancing your mortgage:
1 .​
To obtain a​ lower fixed rate .​
If you​ took out a​ fixed-rate mortgage several years ago and interest rates have since dropped,​ refinancing may lower your payments considerably .​
a​ $150,​000 mortgage with a​ 30-year term and a​ rate of​ 8 percent,​ for example,​ carries a​ monthly payment of​ $1,​100 .​
The same mortgage at​ 6 percent will have a​ payment of​ less than $900 a​ month.
2 .​
To switch to​ a​ fixed rate or​ an​ adjustable rate mortgage .​
Adjustable-rate mortgages (ARMs) offer lower interest rates initially,​ but some homeowners find the​ fluctuations stressful .​
If rates are on​ the​ way up,​ you​ might consider locking in​ at​ a​ fixed rate and consistent monthly payment .​
On the​ other hand,​ if​ you​ want to​ reduce your monthly payments and are comfortable with the​ interest rate changes of​ an​ ARM,​ it​ could save you​ money to​ refinance to​ an​ ARM.
3 .​
To reduce your monthly payments .​
Refinancing for a​ longer term will lower the​ amount you​ have to​ pay each month .​
You will end up paying more in​ interest charges over the​ life of​ your loan,​ but if​ you’re having difficulty making your current payments,​ this strategy could provide some relief.
4 .​
To turn home equity into cash .​
You may want to​ take out a​ new mortgage with a​ larger principal,​ in​ order to​ turn some of​ your home equity into cash for a​ major expense .​
This is​ called cash-out refinancing .​
The advantage of​ taking out a​ loan secured by your home is​ that you​ can get a​ lower rate of​ interest than you​ can with an​ unsecured loan or​ credit card .​
However,​ if​ the​ interest rate offered for your refinanced mortgage is​ higher than your current rate,​ a​ home equity loan or​ line of​ credit might be a​ better choice.
Is refinancing right for you?
If you’re refinancing in​ order to​ pay less interest,​ you​ won’t usually see the​ savings right away .​
That’s because lenders typically charge fees when you​ take out a​ new mortgage,​ and you​ may also have to​ pay a​ penalty for getting out of​ your old one .​
To determine whether refinancing makes financial sense for you,​ consider these issues:
1 .​
How long you​ plan to​ be in​ your home .​
If you​ expect to​ move in​ a​ year or​ two,​ you​ may never realize the​ potential savings you’d get from refinancing .​
As a​ rule of​ thumb,​ the​ longer you​ plan to​ stay in​ your current home,​ the​ more sense it​ makes to​ refinance.
2 .​
The prepayment penalty on​ your current mortgage .​
Many mortgages carry a​ penalty if​ you​ pay them off early .​
The amount varies,​ but it​ is​ usually a​ small percentage of​ the​ outstanding balance,​ or​ several months’ worth of​ interest payments.
3 .​
The costs of​ the​ new mortgage .​
When you​ take out a​ new loan,​ your lender may charge a​ number of​ fees including application,​ appraisal,​ origination and insurance fees,​ plus title search,​ insurance and legal costs that can add up to​ thousands of​ dollars .​
Lenders may also charge discount points,​ which are paid upfront to​ secure a​ lower interest rate .​
As a​ guideline,​ expect fees to​ eat up any potential savings unless your new interest rate is​ at​ least a​ half a​ percentage point lower than your current one .​
To learn more about mortgage refinancing and when it​ makes sense,​ visit

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