Refinancing Your Home Loan
There are lots of reasons you might want to refinance. One of the main reasons homeowners refinance their mortgages is to take advantage of lower interest rates. If rates have lowered since the time of your original mortgage you may refinance your mortgage at a better rate and therefore reduce your monthly payments.
You may opt to refinance as a source of obtaining money at a low interest rate (for a major purchase or if you are just wanting to consolidate debt). See Using Equity to Your Advantage.
To figure out whether it pays to refinance your present mortgage, you must calculate the total refinancing costs and answer the question that may help you decide:
If you are thinking about refinancing your mortgage, you might want to consider other types of mortgages. For example, you might want to look into a mortgage with a shorter term. If you currently have a 30-year fixed-rate loan, you might consider refinancing to a 10-, 15-, or 20-year loan which will lower the total amount of interest you will pay over the life of the loan and will let you to pay off your loan faster.
You also might want to switch an adjustable rate mortgage with high or no limits on interest rate increases to a fixed-rate mortgage which provides the predictability of knowing exactly what your mortgage payment will be for the life of the loan.
It is important to determine the best type of a new mortgage. The type of mortgage loan you select will depend on how long you expect to continue living in your current home and the amount of monthly payment you can comfortably afford.
If you don't plan to stay in your house for at least 5 to 7 years, it will be reasonable to consider an Adjustable Rate Mortgage, Balloon Mortgage or Pay Option ARM. An Adjustable rate loan historically offers lower interest rates during the early years of the loan than fixed-rate loans. A Two-Step Mortgage will give you a lower interest rate than a 30-year mortgage for the first five or seven years. A Balloon Mortgage offers lower interest rates for shorter term financing, usually five or seven years.
You can start to consider 15 or 30 year fixed rate mortgages if you plan to stay in your home for more than 7 years.
The home refinancing process will remind you of what you went through in obtaining the original mortgage. In reality, refinancing a mortgage is simply taking out a new mortgage. You will encounter many of the same procedures and the same types of costs the second time around.
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