The Top Three Reasons for Mortgage Refinancing
A Home Buying Article Contributed by Elizabeth Fox-Wise
The Number One Reason for Mortgage Refinancing is to Get a Lower Interest Rate
It is not hard to understand, why refinancing for a lower interest rate is the reason that most homeowners will choose to refinance their mortgage. A home is the most expensive thing that a person will buy in his or her lifetime, as such a mortgage is the largest debt most of us will ever carry. Refinancing a home mortgage at a lower interest can allow the homeowner to realize a savings of hundreds of thousands of dollars.
However, refinancing a home mortgage for a lower interest rate only makes sense if you plan on keeping the home long enough to recover your costs of refinancing and have time to reap the benefits of the lower interest rate after that.
Therefore, if you are considering refinancing your mortgage for a lower interest rate, you should investigate what it will cost you for the refinancing and how many months of savings it will take before you recover those costs.
The Second Most Common Reason for Refinancing is to Draw Money off of the Home Equity
Some homeowners are refinancing their homes so that they can draw cash off of the equity that they have built into their home by paying their first mortgage for many years. When refinancing for this reason, it is called cash out refinancing.
With cash out refinancing, the home owner applies for a refinance mortgage that is greater than the balance due on the first mortgage. With the money from the refinancing, he pays off the first mortgage and then uses the remainder of the money for an unrelated purpose.
Cash out refinancing is often done as a way to pay off other high interest debt such as credit cards, provide money for home repairs or improvements, or fund something like a wedding or a college education.
If you are refinancing for cash out, it is best if you can also combine it with a lower interest rate. Since you are taking more money than you owed on the first mortgage, monthly payments will increase, a lower interest rate can help offset that.
And Finally, Some Homeowners are Refinancing for Shorter Mortgage Terms
The third most common reason for refinancing is to get a shorter term mortgage. Refinancing to a shorter term mortgage can allow the homeowner to save thousands of dollars on the total cost of the home when finally paid in full.
Refinancing for a shorter term mortgage will also increase your monthly payments, though, so again it is best to combine the refinancing with a lower interest rate term to help offset the monthly increase.
If you can handle the increase in the monthly payment, the savings realized over time are substantial enough to be worth it. The total cost of a thirty year mortgage carried to full term is approximately double that of a fifteen year mortgage when everything else, such as mortgage amount and interest rate are equal.
Therefore, if your first mortgage was a 30 year and you have paid on it for 10 years with 20 years remaining, consider refinancing to a lower interest rate 15 year mortgage. Even the five years of savings will make a big difference.
