When you refinance a mortgage, you pay off a loan and replace it with another one. There are many reasons that people decide to refinance their mortgage. Some people want to shorten the term of their mortgage. Others want to get a lower interest rate. Additionally, some people want to consolidate their debt.
Refinancing your mortgage has many benefits. However, there are a few things that you will need to take into consideration before you refinance your mortgage.
Get a Lower Interest Rate
This is one of the best reasons to refinance your mortgage. In the past, people would only recommend that you refinance your mortgage if you can save at least 2 percent or more in interest. However, experts today have stated that refinancing is worth it if you can save at least 1 percent in interest.
Reducing your interest rate can help you save a lot of money. It can also help you build equity. Additionally, you can reduce your monthly mortgage payments by refinancing. For example, you have a 30-year mortgage on a $100,000 home. The interest rate is 9 percent, and your monthly mortgage is $804.62. You get the interest rate reduced to 6 percent. Your new monthly mortgage payment will be $599.55.
Shorten the Term of Your Loan
You can refinance your mortgage and shorten the term of your loan. For example, you have a 30-year mortgage on a $100,000 home. The current interest rate is 9 percent. You get the interest rate reduced to 5.5 percent. You will be able to cut the term of your loan in half. Your monthly payments will increase slightly from $804.62 to $817.08.
Converting Adjustable to Fixed-Rate Mortgage
Adjustable-interest rates are often start off lower than fixed-interest rates. However, they will be adjusted over time. That is why adjustable-interest rates are usually higher than fixed-interest rates after a few years.
The interest rates are decreasing. That is why it makes sense to convert to a fixed-interest rate mortgage. You may not only be able to get a mortgage with a lower interest rate, but you can also reduce your mortgage payment.
This is a great idea if you only plan to stay in your home for a few years. You will not have to worry about interest rates rising if you have a fixed-interest rate.
Many people refinance their mortgage because they want to consolidate their debt or build equity. Homeowners may use equity to finance their child's education or remodel their home. You may also be able to get a tax deduction if you refinance your mortgage. However, it does not make sense to add years to your mortgage in order to get a tax deduction or build equity.
Refinancing your mortgage to consolidate debt can be a good idea. You can replace a high-interest debt with a mortgage that has a lower interest. However, you should only choose this option if you do not plan on getting back into debt after you pay it off. Many people who refinance their mortgage to pay off credit cards and loans often end up falling back into the debt trap.
Some people are not unable to get out of this debt. Many people file for bankruptcy because they can no longer manage their debt.
What is the Bottom Line?
Refinancing your mortgage can greatly benefit you. It is possible to get a mortgage with a lower interest rate, which can help reduce your monthly payments. You may also be able to pay off your mortgage more quickly and build equity. However, it is important to look at your financial situation before you decide to refinance your mortgage.
The cost of refinancing is something else that you should consider before you do it. It cost around 3 to 6 percent of the principal balance in order to refinance. It will take you years to recover the cost. That is why you probably will not save any money if you do not stay in your home for several years.
Most people are looking for ways to reduce their debt, build equity and save money. You will not be able to achieve any of those goals if refinance and cash out your equity.
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