Refinance Your Mortgage

Refinance your mortgage

Refinancing you mortgage is a great way to save money if you have an existing bad credit equity home loan. There are many reasons why it is important to refinance your mortgage:
1. It gives an opportunity to obtain a lower interest rate
2. It gives a chance to shorten the term of the mortgage
3. It helps to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa
4. It gives an opportunity to tap a home’s equity in order to finance big purchases
5. Helps to consolidate debts.

Anyhow, these motivations have benefits and pitfalls. Refinancing can cost around 3% to 6% of the loan’s principal. Since taking out the original mortgage requires appraisal, title search and application fees, it is advisable for a homeowner to check before hand if the refinancing offers true benefit.
One of the best reasons for refinancing is to lower the interest rate on an existing loan. It is worthy the money to refinance if you can reduce your interest by at least a meager 2%. Reducing your interest not only helps you to save money, but also increases the rate at which you build the equity in your home. This will decrease the size of your monthly payment. When interest rates are low, homeowners stand to have an opportunity to refinance an existing loan, without much change in the monthly payment.
While ARMs offer lower rates than fixed rate mortgages, periodic mortgage adjustments most often result in an increase in the interest rate that are higher than the interest rate of a fixed-rate mortgage. If this happens, the conversion into a fixed rate mortgage results in a lower rate of interest. This also eliminates the concern over future hikes in interest rates.
In the same way, converting from a fixed rate mortgage to an ARM can also help you, particularly when interest rates fall. Converting to ARM is a good idea especially for those homeowners who are not planning to stay in their home, for more than just a few years. These homeowners can reduce the loan’s interest and monthly payment, if the interest rates are falling. And they don’t have to worry about future hikes in interest rates.
Like the sides of the same coin, the mortgage loans are also not free from pitfalls. It may lead to never ending debts. This usually occurs when people resort to refinancing for the purpose of tapping into home equity or consolidating a debt.
There is a growing tendency of homeowners to access the equity in their homes for covering big expenses, like costs of children’s higher education, remodeling of home, etc. They justify this by saying that the interest rate on the mortgage loan is less than the rate on money borrowed from any another source. Even if the argument is true, increasing the number of years that you owe the mortgage is not at all a smart financial decision.
Many homeowners refinance for the consolidation of debt. Even if replacing high-interest debt with a low-interest mortgage is a good idea, it is not wise because refinancing does not lead to an automatic close of debts. This happens because a large number of people who were once subjected to high-interest debt on credit cards, cars and other purchases will have a tendency to simply do it again once the mortgage refinancing gives them the credit. This leads to an instant loss by way of refinancing fees, lost equity in the house, many more years of increased interest payments on the new mortgage and thus landing them back to where it started, that is, a high-interest debt. This is the most possible dreaded outcome of illegitimate spending, thus leading to the perpetuation of debt cycles.
Refinancing, when used carefully, can be a valuable tool in getting your debts under control. But look before you leap, that is, before you set out for refinancing an existing loan, just have a clear cut idea of the financial set up and also about your priorities.
Refinancing generally costs around 3% to 6% of the loan’s principal. If you are not planning to stay in the home, for more than a few years, there is chance that the cost of refinancing may negate the potential savings.
Even if refinancing your mortgage helps you save money, it is advisable to consider the pros and cons of it before signing the papers. It could prove wrong if not approached wisely.