A refinance mortgage is a second loan that is taken out in order to pay off the outstanding mortgage or mortgages on a home. There are a number of reasons a homeowner may want to refinance their home. One thing to consider when thinking about a mortgage refinance loan is to see if the amount you would save on interest payments is greater than the amount of fees you incur in taking out the new loan. Some of the reason refinancing your mortgage may benefit you include:
Lower Your Interest Rates: Over time interest rates will rise and fall due to factors out of your control. Should interest rates fall after your first mortgage was taken out or if you have significantly improved your own credit score, you may have access to rate lower than your current interest rate. Even saving .5% on a mortgage could possibly save you thousands over the life of the loan. Locking in a lower interest rate can allow for you to lower your monthly payment or pay off the loan faster.
Locking in a Fixed Rate: While home prices were rising fast and home owners were flipping into new homes every few years many individuals choose to use an adjustable rate mortgage. This allowed then to get the best rate even but that rate was only locked in for a few years after which time the rate would rise based on the marketplace. By refinancing into a fixed rate mortgage you may not get as low of a rate many adjustable mortgage can offer but you have the peace of mind in knowing that your rate will never change and your mortgage payments will stay the same for the life of the loan.
Cash-out Refinance: Equity can be built up in a home by either appreciation of the property or as you pay down the principal with your monthly mortgage payments. Over time this equity can be tapped into a number of different ways. A second mortgage or home equity loan gets you a second mortgage on the property and you receive a lump sum of cash. With a cash-out refinance mortgage you refinance the first mortgage with a new mortgage that is greater than the current mortgage but less that the value of the home. This difference is paid out to you in a lump sum.
Refinance to Shorten the Length on the Mortgage: You may have started out with a 30 or even 40 year mortgage. However, if interest rates have fallen a refinance mortgage could enable you to change to a 10, 15 or 20 year mortgage and pay off the home faster. This can save you thousands of dollars in interest payments over the life of the loan. Also, if your mortgage refinance rate is lower and you can maintain the same monthly mortgage payment, you would be able to build up equity in your home much faster since a larger portion of your mortgage payment would be going to principal.
Removing PMI (Private Mortgage Insurance): If you were not able to come up with a 20% down payment when you purchased your home you probably had to pay PMI on your home. However, if your home has appreciated in value enough you may be able to refinance your mortgage and remove the PMI all together. This could save you thousands over the term of the loan.
