Your home may be your most valuable financial asset, so you want to be careful when choosing a lender or broker and specific mortgage terms.
Remember that, along with the potential benefits to refinancing, there are also costs. When you refinance, you pay off your existing mortgage and create a new one. You may even decide to combine both a primary mortgage and a second mortgage into a new loan. Refinancing may remind you of what you went through in obtaining your original mortgage, since you may encounter many of the same procedures--and the same types of costs--the second time around.
Why consider refinancing? When is refinancing not a good idea? Are you eligible to refinance? What will refinancing cost? What is "no-cost" refinancing? How do you calculate the break-even period? Refinancing calculators How can you shop for your new loan? The interest rate on your mortgage is tied directly to how much you pay on your mortgage each month--lower rates usually mean lower payments. You may be able to get a lower rate because of changes in the market conditions or because your credit score has improved.
A lower interest rate also may allow you to build equity in your home more quickly. Increase the term of your mortgage: You may want a mortgage with a longer term to reduce the amount that you pay each month. However, this will also increase the length of time you will make mortgage payments and the total amount that you end up paying toward interest. Decrease the term of your mortgage: Shorter-term mortgages--for example, a year mortgage instead of a year mortgage--generally have lower interest rates.
Plus, you pay off your loan sooner, further reducing your total interest costs. The trade-off is that your monthly payments usually are higher because you are paying more of the principal each month. Tip: Refinancing is not the only way to decrease the term of your mortgage. By paying a little extra on principal each month, you will pay off the loan sooner and reduce the term of your loan. If you have an adjustable-rate mortgage, or ARM, your monthly payments will change as the interest rate changes.
With this kind of mortgage, your payments could increase or decrease. You may find yourself uncomfortable with the prospect that your mortgage payments could go up.
In this case, you may want to consider switching to a fixed-rate mortgage to give yourself some peace of mind by having a steady interest rate and monthly payment. You also might prefer a fixed-rate mortgage if you think interest rates will be increasing in the future. Tip: If your monthly payment on a fixed-rate loan includes escrow amounts for taxes and insurance, your payment each month could change over time due to changes in property taxes, insurance, or community association fees.
If you currently have an ARM, will the next interest rate adjustment increase your monthly payments substantially? You may choose to refinance to get another ARM with better terms.
For example, the new loan may start out at a lower interest rate. Or the new loan may offer smaller interest rate adjustments or lower payment caps, which means that the interest rate cannot exceed a certain amount. Tip: If you are refinancing from one ARM to another, check the initial rate and the fully-indexed rate. Also ask about the rate adjustments you might face over the term of the loan. Home equity is the dollar-value difference between the balance you owe on your mortgage and the value of your property.
When you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment this is called a cash-out refinancing. Remember, though, that when you take out equity, you own less of your home. It will take time to build your equity back up. This means that if you need to sell your home, you will not put as much money in your pocket after the sale.
If you are considering a cash-out refinancing, think about other alternatives as well. Consumer Credit Outstanding Flows 1 Not seasonally adjusted.
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