Reasons Home Owners Refinance Their Mortgage to a Lower Rate
A Home Buying Article Contributed by Elizabeth Fox-Wise
Reasons Home Owners Refinance Their Mortgage to a Lower Rate
Mortgage Interest Rates are at an all time low. According to Bankrate.com, today's mortgage rates are record setting. With a thirty year fixed mortgage available for 5.36%, a fifteen year fixed mortgage rate of 4.78%, and variable mortgage rates being offered as low as 3.44%, there has never been a better time for home owners to refinance their mortgage and lock in on a record low mortgage interest rate.
Some Homeowners Refinance to a Lower Mortgage Rate to Shorten the Life of the Mortgage
When it comes to long term savings, this is one of the best reasons for refinancing your mortgage to a lower rate. By refinancing to a lower mortgage rate, it is often possible to lower the number of years on the mortgage without raising the costs of your monthly mortgage payments.
If you are currently able to handle your monthly mortgage payment, it is best to refinance for a shorter term loan than for a lower monthly payment. This is because a shorter term mortgage will end up costing you less for the total cost of your home in the long run. A thirty year mortgage at a five percent mortgage rate will end up costing you about double the cost of the home by the time the mortgage is paid off. In comparison, a ten year mortgage at the same five percent mortgage rate will only cost you about 30% more than the cost of the home when the mortgage is paid.
Some Mortgages are Refinanced to a Lower Rate to Reduce Monthly Costs
It is not uncommon for a home owner to refinance their mortgage to a lower rate and still keep the length and terms of the mortgage the same. Obviously by refinancing your mortgage to a lower rate you will still save money, but it will not help you to get your home paid off any faster.
If you are having a hard time making your monthly mortgage payments or if having a lower mortgage payment will allow you to have the cash available to pay off higher interest rate debt, then refinancing for a lower monthly payment is not a bad idea. But if you refinance to lower rate and then just "waste" the money saved, you will not come out ahead.
And Still Others Refinance to a Lower Mortgage Rate to Draw Cash out of Their Home Equity
Depending on the amount still owed on your first mortgage, the amount of equity in your home, and the current market value on your home, you may be able to refinance to a lower rate, draw cash off the equity in your home and still come out ahead.
However, doing this is not always the best idea in the long term. If you refinance to get equity out of your home and then use that money to pay off credit cards and other short term debt, all you are really doing is switching it from short term to long term debt. Then if you go out and run up more short term debt on credit cards and such, you are worse off than you started.
While drawing equity off of your home through a mortgage refinance is a tempting way to get access to cash at a low interest rate, you need to consider the fact that over the long haul, your home will end up costing you more in the long run for having done this.
