Reasons to Refinance Your Current Mortgage
Written by Daphne Tai   



What exactly is a Mortgage “Refinance”? In a simple way to explain, a Refinance is replacing an older loan with a new loan offering better terms.


These better terms often involve:
  • Reducing monthly payments/lowering interest rates;
  • Keeping payments stable with a fixed-rate loan;
  • Option to shorten the length of mortgage;
  • Providing the opportunity to consolidate existing debts; and
  • Getting cash out from your home’s equity.

Reducing Monthly Payments Through Lower Interest Rates

Both reducing monthly payments and lowering interest rates have the same purpose: pay less for your mortgage. Since refinancing will adopt the current interest rate, if you refinance, the old interest rate you paid with a higher monthly payment is then replaced by a new and lower rate that equates to a lower monthly payment.


Finding Stability

Another benefit of refinancing is to keep the payments stable with a fixed-rate loan. There are two kinds of interest rates used in mortgage: fixed-rate and adjustable-rate (ARM). Of course when rates are low, adjustable-rate is a desirable option. However, if the interest rates are high, fixed-rates become the less risky choice. Usually people are risk-averse, and with fixed-rate option, borrowers know exactly how much they pay each month.


Taking Control of the Term of Your Loan

Refinancing allows homeowners to change the term of loan, which is the length of the mortgage. Usually the duration of 10, 15, 20, or 30 year is very common.  If a borrower is on a 30-year term, with mortgage refinance, she can switch to shorter terms like 10, 15, or 20 years. Shortening the length of the mortgage might give the borrower a lot of savings by paying off more principal rather than paying for the interests.


Consolidating Debt

Getting a refinance loan helps you to consolidate your outstanding debts and makes it easier for you to pay them off. Debt consolidation means taking out one loan to pay off many other existing loans. In other words, people place their home under a second mortgage where they get money to pay off all their smaller and numerous debts so that they only have one debt to worry about. And usually they get lower interest rates through this process.


Accessing Equity

Last reason but usually not the main reason of refinancing is to get cash out from your home’s equity. Many borrowers realized the appreciation of their real estate holdings by taking cash out from their house and using it for other purposes.

 

 
Last Updated on Wednesday, 22 December 2010 05:23