Reasons you may want to refinance your home
Interest rates are still very low compared to a decade ago. Average mortgage interest rates continue to stay around the 6.5% mark for the 30 year fixed loan. You may have thought about refinancing your home loan before, but just never got around to following through, or maybe you just didn’t know if it would be in your favor. Everyone’s financial situation is different and you should consider many different factors before you decide to refinance. Some factors to consider are your financial goals, your current interest rates, the currently type of mortgage loan you have, and how long you want to stay in your current home. After you consider these factors here are 5 instances when you may want to consider refinancing your current home mortgage loan.
Refinance from an adjustable rate mortgage (ARM) to a Fixed-Rate Mortgage
An adjustable rate mortgage is a type of mortgage loan that is fixed for a certain amount of time, usually 3, 5, or 7 years. After that time period the rate adjusts usually according to the current prime rate. The interest rate can continue to rise with the prime rate up to a certain percentage. The advantage to an ARM loan is a lower interest rate and payment for a short period of time. If you had an arm loan a couple of years ago with a really low interest rate and that term is expiring you may want to refinance your mortgage loan into a fixed-rate in order to avoid the rising interest rates.
Refinance from a fixed-rate mortgage to an ARM
A fixed-rate mortgage is a loan for a certain time period, usually 15, 20, 25 or 30 years. The interest rate is fixed for the entire period of loan. This is a great deal if interest rates are low when you lock the rate, but bad if the rate you have is much higher than current interest rates. A good time to refinance your fixed-rate mortgage to an ARM loan is if yo are planning on moving in the next 3,5, or 7 years and interest rates are much lower now than your current fixed rate. You can take advantage of the lower interest rates and then purchase your new home before the rates start to rise.
Lower your monthly mortgage paymnet
You may want to consider refinancing your home mortgage loan to lower your monthly mortgage payment. Even the smallest drop in interest rates can change a monthly mortgage payment significantly. For example lets assume you borrowed $250,000 on a home 5 years ago at 7.5% for 30 years. Today interest rates have dropped to 6.25% and you want to consider refinancing the mortgage. Your original mortgage payment would have been around $1750, your new payment would be $1435 a savings of about $315 per month. I’m assuming you paid your exact payment for 5 years so you would only refinance $233,000. There are other factors to consider such as closing costs but some simple math can save you some money in your monthly budget.
Getting cash from your home for improvements or additions
Wanting to finish the basement, add on a patio, screened in porch or swimming pool? Where will you get the money to do these projects? A great option is a home equity loan. If you got equity in your home you can take out a second mortgage on the house to finance the other projects. Not only will you get a better interest rate than a credit card but the loan is also tax deductible.
Consolidate high interest rate credit card debt
If you’ve got yourself into more debt than you can handle it’s possible to take out a second mortgage on the house to consolidated high interest rate credit card debt. I’m not a big fan of this method because most people who choose this option will use the credit cards again. Be very careful when taking loans against your home it’s your prized possession and mortgage companies won’t hesitate to take it away from you.