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Advantages Of Refinancing Your Home Mortgage

By Brian Jenkins
Should I refinance my mortgage? This is a question by many homeowners whenever the mortgage interest rates drop or people find themselves in different financial situations than when they first purchased the house. Although mortgage refinancing does not make sense for everyone, there are definitely advantages to refinancing. Here are some that you should consider: (continued below)

Advantages Of Refinancing Your Home Mortgage

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Advantage #1: Saving Money In Interest Payments Over Time

Most people refinance in order to save money when it comes to their interest payments. When you refinance for a lower interest rate, it typically doesnt look like youre making a huge difference, since your monthly mortgage payment wont drop that much.

However, say you still have 13 years left on your loan and you monthly mortgage payment drops by just $25. Over the life of the loan, that means that youll save nearly $4000. The small savings can really start to add up. A word to the wise: make sure that your closing costs dont negate the benefits of refinancing. If youll save $4000, but you have to pay $4500 in closing costs to refinance, youre better off not saving the $25 every month.

Advantage #2: Lowering Your Monthly Payments

Although refinancing is most common for those who want a lower interest rate, you can also refinance in order to lower your monthly payment. With this option, youll lengthen the term of your loan. So, if you still have $50,000 left on your mortgage and are supposed to pay that back over the course of 10 more years, you can lower your monthly payment by paying back over the course of 20 more years instead.

When you take this course of action, you will pay more in interest in the end, so it does not make sense to refinance unless you are nearing a desperate situation. After all, you will have to pay for closing costs in this case as well, and since your financial situation is not good, those costs will have to be added to the total of the loan, costing you even more money in interest. If you choose this option, some lenders will also increase your interest rate. However, compared to foreclosure, refinancing to lower your monthly payments can be a good choice.

Advantage #3: Consolidating Debt

If you have enough equity in your home, you can refinance your mortgage to consolidate other debts. This works especially well if you have a lot of credit card debt. You put equity into your home whenever the value of your home increases (due to improvements or market condition) or whenever you make a payment that goes toward the principle of the loan (not the interest). Your down payment added initial equity, and most lenders require at least that amount (around 10% 20%) to stay with the house. That way, if you default, the bank can sell the home quickly to recoup all losses, even if they have to sell it for under the amount of your original mortgage. When you refinance to get access to your equity, you can take money out, re-adding it to your mortgage total, as long as you keep that 10% to 20% intact. That money can then be used to pay off debts where the interest rate is much higher than the interest rate on your mortgage. In the end, youll save money in most cases (though dont forget about closing costs, once again).

Advantage #4: Shortening the Term

You can also refinance your home to pay it off early. Paying off the mortgage sooner than expected is good for your credit and less of a hassle, since you wont have to remember to send out monthly mortgage checks. With a typical loan, like youd get with a used car loan or student loans, youre more than welcome to pay off the loan as quickly as possible.

However, with a mortgage, lenders discourage paying off the debt early. Lenders make money by charging you interest, and if you pay off your debt really early, theyre missing out on a lot of interest money, since a house is so expensive. To ensure that they dont lose too much income, they charge an early payment penalty. If you refinance, however, you can shorten the term of your loan, making it possible to pay it back earlier without paying a fine.

Advantage #5: Getting Cash Back For Home Improvements

Like with consolidating debt, you can cash in on the equity of your home in order to get money for home improvements. Lenders are usually on board with this type of refinancing and may even offer you a lower interest rate if you put the time into home improvements, since it will vastly improve the value of the home.
About The Author
Brian Jenkins is a freelance writer who writes about mortgages and home ownership, offering tips such as how to find the lowest mortgage rates.