Top 4 Reasons to Refinance

According to the Mortgage Banker association, the average American refinances his or her mortgage every four years! 

Here are the top four reasons why a home owner refinances. 

1.  Get a lower interest rate - The homeowner is swapping a higher interest rate for a lower one.  

2. Switch your mortgage type - If you have an adjustable rate mortgage (ARM) that offered great low introductory rates, but those rates are about to increase. The opinion to change to a fixed-rate mortgage will give you a consistent monthly payment.  Or if you have attractive low rates for an ARM, then you could switch to an ARM.

3.  Build home equity faster - If you can pay more toward your monthly mortgage payments. Either by refinancing from a 30 year fixed to a 15 year fixed, you can reduce your interest charges and pay off your home quickly.  Or if you don't want to refinance, you can pay against your principal by making additional payments each month. 

4. Take cash out - Pulling equity out of the home in the form of cash but you add to your principal in the process.  Example: Joe has a home worth $500K, and he owes $300K on his mortgage and has $200K in equity.  By refinancing his existing loan, and his mortgage will look like this: $500K home value, $400 mortgage and $100 in equity.  

However, is Refinancing right for you?

Before contacting a lender, ask yourself these questions:

How long will I be in my home? General rule of thumb is that unless you are planning to stay in your home at least another five years, then refinancing may not make sense.  You usually "break even" at the five year mark which means you have paid for the costs to refinance. 

Is there a prepayment penalty on my current mortgage?  Many mortgages carry a penalty if you pay off your existing mortgage.  Ask your lender if your mortgage has a prepayment penalty.  

Will my tax savings be reduced?  If you claim mortgage interest on your tax return, refinancing to a lower rate will mean that you'll have less mortgage interest to deduct.  Check with your tax advisor.

Can I build equity faster?  For a shorter-term mortgage might make sense for someone who can now make greater monthly payments than when they originally financed.   

Can I reduce my monthly payments? 

Can I cash out some of my equity? 

Remember, refinancing helps many homeowners stay in their homes for less money, or give them cash out they desire, but just make sure you do the math and understand how the new loan will affect you.