When is it a Good Time to Refinance Your Existing Mortgage?

There are times when it becomes difficult to afford your monthly mortgage payments. This is when most borrowers think of refinancing their mortgages. However, choosing this option is good only if it works out beneficial in the long term.

A home owner may think of refinancing his existing mortgage for any of the following reasons:

  • To secure a lower interest rate
  • To shorten the mortgage term
  • To shift from an ARM (Adjustable rate mortgage) option to a FRM (Fixed Rate Mortgage) option, or vice versa
  • To tap into his home equity and go for a bigger home
  • To consolidate his debts

Any of these reasons may be valid enough to take such a step. Nevertheless, one has to look into a number of factors such as the interest rate of the new loan, the mortgage market scenario, the financial situation of the home owner and the amount of money that can be saved by going for such an option.

One thing that home owners need to understand is that refinancing a mortgage does not come without costs. In fact you may have to spend anywhere between 3 and 6 percent of your principal amount to cover different costs such as application fees, title search fees and appraisal fees. Therefore, it becomes crucial to find out whether such a refinance actually offers a real benefit, before going for one.

For Low Interest Rate

This is probably the best reason to refinance your mortgage. However, make sure the refinance option you choose drops down your interest rate by at least 2 percent. This will not only help you save your money by reducing your monthly payments, it will also enable you to build up on your home equity at an increasing rate. For instance, if you have borrowed a Fixed-rate mortgage of $100,000 for 30 years at the rate of 9%, your monthly mortgage payment would be $804.62. This amount would be reduced to $599.55 if you can refinance your mortgage at 6% interest rate.

For shortening the term of your loan

When the mortgage rates are at a low, you can refinance your existing mortgage to shorten its term. Ideally such an option should not make much of a difference in your monthly mortgage payment. For instance, by cutting down your interest rate from 9% to 5.5% on your $100,000 30-year fixed rate mortgage, you can shorten your term by 15 years. While your earlier monthly payment was $804.62, your new monthly payment would be $817.08.

For changing an Adjustable-Rate mortgage to a Fixed-Rate Mortgage or vice versa

You may have borrowed an adjustable rate mortgage because of the low interest rate charged during the initial period of time. However, with time, the interest rate starts increasing and at some point exceeds the rate that is available for a Fixed-rate mortgage. This is when you should ideally refinance your mortgage and change it to a Fixed Rate mortgage.

On the other hand, it could be wiser to convert a fixed rate mortgage into an adjustable rate mortgage when the interest rates are falling. If these rates continue to fall, you can be assured of your ARM rate decreasing with the periodic rate adjustments. As a result your monthly mortgage payments start getting smaller with time.

If it is only for a few years that you plan to stay in your home, it would be a good idea to convert your fixed rate mortgage into an adjustable rate mortgage. Especially in a market scenario where the interest rates are falling, you don't have to worry about re-converting your loan in order to lower your monthly payment.

For Tapping into Equity or Consolidating your Debt

There is an option called cash out refinancing where you can go for a bigger mortgage than your existing one and use the extra cash to make home repairs, to pay up for your child's education or to consolidate your debts. However, this option is available only if your home equity has increased over the years. Nevertheless, you need to make sure you don't end up increasing the term of your mortgage or making your monthly mortgage payments unaffordable.

If you are going for a refinance to consolidate your debts make sure the interest is lower than what you need to pay on your other debts. You will have to be very careful while choosing this option for the purpose. Although this might seem wiser at the face value, it doesn't necessarily lead to financial prudence. Do your homework well and make sure you control your spending once you have the excess cash on hand. If you keep on increasing your credit card bills and other purchases, refinancing your mortgage would have no meaning at all. You will only end up in a perpetual debt cycle, eventually leading yourself into a state of bankruptcy.

The Bottom Line

Refinancing can be a valuable tool if used carefully. It can help you lower your monthly payments, get your debts under control, build up on your home equity and become debt-free within a short span of time. However, before taking this step it is important to analyze your financial situation and answer the following questions:

How long would I be living in this house?

How much money can I save by going for a refinance?

In what way will refinancing help me and what effect would it have on my financial situation?

One good thing about all this is the ease in finding a lender who can refinance your existing loan. There are many spread across the nation and they offer different options such as FHA mortgages, VA mortgages apart from conventional mortgages. A few may even try contacting you by purchasing your details in the form of mortgage leads. It pays to make sure you are taking the right step by refinancing your mortgage, before you say 'Yes' to any of these lenders, who come to you via mortgage leads.

Author writes for Heritus Lead Transfer LLC. A Reverse Mortgage Lead generation company in New York, US. Contact Heritus for Mortgage Live Transfers .

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