Does Refinancing A Home Make Sense?
July 26th, 2010 | 
Author: Does Refinancing A Home Make Sense?
Refinancing mortgage loan basically means that home owner is replacing mortgage payments and terms of the loan to new terms and monthly payments. Home owner refinance mortgage loans for several reasons. Mortgage payments are one of the largest monthly expenses for any family. Reducing the payments gives extra cash to the home owner to manage other expenses.
First and one of the best reasons could be to lower their monthly mortgage payments. Interest rate for home loans changes all the times based on economy. If the mortgage interest rate goes down then it is a financially wise decision for home owner to refinance the mortgage loan. This way home owner can reduce the monthly payment of mortgage loan and can have substantial free money to utilize for other expenses.
Second good reason could be to change the financing term from adjustable loan to fixed loan. Depending on the individual financing condition when people buy real estate they opt for adjustable loan which gives flexibility to home owner to pay lower monthly mortgage payments. Adjustable mortgage interest rate is normally tied up with economy and as the interest rate raises the mortgage monthly payments goes up. Adjustable mortgage loan gives uncertainty of monthly home payment and home owner are very uncomfortable to have that fear. By refinancing the adjustable mortgage loan to fixed mortgage loan gives home owner security of having same monthly payments for the term of the loan. Fixed mortgage loan will have no impact of economy in future.
Third reason could be to take out the equity or get line of credit for personal financial reason. Home renovation could be one of the reason home owner may want to use equity.
Another reason could be to reduce the life of the loan. Home mortgage loans are normally for 30 years or 360 monthly payments. Home owner could have several option attached with loan terms to pay off the loan ahead of the terms. Paying off mortgage earlier could be their strategy for retirement plan.
One more reason which is used for financial gain is to refinance the loan to get exemption from PMI Private Mortgage Insurance. When home owner get the first time financing it is normally for more than 80 of the loan amount. Lender charges home owner for PMI which is included in the monthly payment. Once home owner build some equity in the house then it can be refinanced for less than 80 of the loan saving home owner PMI payment. This way home owner may reduce the monthly payment.
Mortgage Refinancing is a term used for taking another loan to replace the previous one with the same asset as the collateral. Refinancing can be worthwhile provided you choose the one that is according to your requirements and situation. You can opt for a mortgage refinance according to your convenience.
Primarily refinancing is done to reduce monthly payments. Refinancing your mortgage helps you in bringing down the monthly payments either by shifting to the current lower rate of interest prevailing in the market or by reducing the length of the period of payment or both.
Refinancing lets you benefit from the present lower interest rates of the market. Initially the interest rates may have been higher than what they are now but that does mean you need to continue paying exorbitant rates. The extra cash saved can be utilized for meeting other expenses.
The cash saved from reduced monthly payment can be used other purposes such as personal expenses paying off other debts or paying down the principal of the loan.
An advantage related to mortgage refinance is that it reduces the risk associated with the existing loan. Interest rate is subject to fluctuations. It can rise any moment causing you to pay high sum of cash. To avoid insecurity you can shift from ARM Adjustable Rate Mortgage to FRM Fixed Rate Mortgage. This ensures a steady interest rate throughout. Also if you choose to extend your stay in the house more than seven to eight years it is always preferable to shift from ARM from FRM.
Another option is that one can reduce the period of the payment. This will help in getting rid of burden of the loan faster and save a considerable amount of dollars that could have gone in paying extortionate interests.
If in case at the time of purchasing your house you were unable to pay a down payment of 20 percent you are required to pay a PMI Private Mortgage Insurance. But if you have been steadily paying down your mortgage and the value of your house has gone up then your equity will increase 20 percent. In that case by refinancing your mortgage you can terminate paying further PMIs.
About the writer: The author John Daniel is a licensed Real Estate Broker and investor in Orange County California. He is an experienced realtor that specializes in South Orange County residential homes and Orange County investment real estate. Find more information at: http://www.jdanielrealty.com
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