Reasons for refinancing a mortgage
There are many situations and reasons to refinance your current existing mortgage. Most of the people think that refinancing should only be done in order to reduce the interest rate on the mortgage and to cut down on the monthly mortgage payment. However, there are other situations as well which may need you to refinance your home loan. These are some of the common reasons why you can consider refinancing your mortgage.
To Reduce Payments
The primary reason why people refinance their mortgage is to take advantage of the lowering of interest rate in the mortgage market. By refinancing to a mortgage with a lower interest rate, you are able to reduce your monthly payment and save money. Refinancing to a lower interest rate can save you thousands of dollars over the entire term of the mortgage.
To restructure your mortgage plan
Many people needs to refinance their mortgage even though there is no immediate monetary saving to be received from such a step. Such a situation usually arises when the borrower has a balloon mortgage coming to a close of its term when a large payment is due to the lender.
Refinancing this short-term balloon mortgage in order to avoid the balloon payment and refinancing it to a long-term loan can become an immediate priority of. In fact when many people take a second mortgage or use the 80 — 10 — 10 financing, they count on the fact of being able to refinance their mortgage when the time comes to make the impressively large balloon payment.
Another reason that people sometimes choose to refinance is to convert their adjustable rate mortgage into a fixed-rate mortgage. If the volatile conditions in the market is making you nervous and making you have sleepless nights worrying about for increase on the interest rate of your mortgage, you can choose to refinance to a fixed-rate mortgage for the peace of your mind.
To Get Large Sum Of Money
Large expenditures such as a wedding, home improvements, college fees for your child etc may require an influx of a large sum of money. Many homeowners choose to refinance existing mortgage to take advantage of the built-in equity in the value of the home. If you have owned your property for some time, and the real estate market has been going well where the value of your property is more than what you purchased for, you can refinance your current mortgage in order to withdraw some of its built-in equity.
The longer you have owned your property for more equity it is likely to have built because of two reasons. If you have been making loan payments for a long time, the balance of the mortgage and hence your liability on the home has decreased. Number two, with the appreciation of the value of the real estate, the property of the house has increased.
Refinancing for Improvements in the Credit Score
We have mentioned in the past that people who have taken a mortgage loan during the time that they had a bad credit rating may find that making regular payments on the mortgage has increased their credit rating. Other factors could also be responsible for your credit improving in the future. Having a bad credit rating might means that you will be able to qualify for a mortgage loan with a better interest rate and better terms and conditions.
Refinancing for Consolidating Debt
Refinancing a mortgage can also be used to consolidate unsecured and high interest debts such as credit cards. Since a mortgage loan has a lower rate of interest than credit card interest in most of the cases you will be able to pay off your high interest debt in one go and then have much smaller payments to make every month.
The two important things to be considered in the scenario is that you are converting an unsecured debt into a secured debt which is backed up by your home. This can be a very risky thing to do. Secondly, you have to realize that even though your monthly payments may reduce you might be paying much more on interest over the entire term of the mortgage than you would if you just paid off your credit cards.