Mar 28, 2013

Reasons that Justify Your Decision of Refinancing Your Mortgage Efficiently

Refinancing a mortgage involves disbursing off the current loan and replacing the same by taking another one. This new loan can be brought through different means such as from bank or authorized institutions such as Network Capital Funding Corp. However, the cost of refinancing can range from 3% to 6% of the principal amount, and that it calls for appraisal, application fees, and other formalities demanded by the original mortgage. Therefore, it becomes vital for a homeowner to justify her or his decision of refinancing for reaping its benefits. There are several reasons why refinancing is found to be useful, and that each of them has a unique set of pros and cons. So, let’s check them out now!

For Reducing the Term of the Loan
The homeowners often find it useful to refinance an existing loan when there is a chance of getting a shorter loan term. For example, refinancing 25-year mortgage on a $200,000 property at a fixed rate from 8% to 5% can bring down the term to 12 years. Herein, the monthly payment may or may not change.

For Obtaining a Lower Interest Rate
One of the ideal justifications for refinancing mortgage is to enjoy a lower interest rate on the current loan. Reduced interest rate is certainly the most desired benefit because it not only aids in saving money but also helps in boosting the rate at which one can create equity in home as well as reducing the pay that is given on a monthly basis. In the past, the common rule was that it was beneficial to refinance if one would obtain a lower interest rate by a minimum of 2%. However, the current experts are of the opinion that 1% savings is a good motivator to opt for refinancing. For instance, a 25-year mortgage with an interest rate of 8% on a $200,000 property can be refinanced at 5% interest rate, which also reduces your monthly payment.

For Shifting between Fixed-Rate and Adjustable-Rate Mortgages

It is true that adjustable rate mortgages begin by providing you lower rates than the fixed-rate ones. However, intervallic adjustments typically lead to an increase in rate that is higher than the fixed-rate mortgage’s rate. In this case, it is better to convert the adjustable rate mortgage into to a fixed-rate one for reaping the benefits of lower interest rate and prevention of interest rate hike in future. However, even the converse can be a beneficial decision, especially when the interest rate is falling. When the interest rates tend to fall, the intervallic rate adjustments on an adjustable rate mortgage lead to reducing rates as well as smaller payments per month. As a result, the need to refinance consistently is eliminated gradually.

Moving to an adjustable rate mortgage is a sound decision particularly for those who do not wish to stay in their house for more than some years. When the interest rates fall, these people can bring down the rate as well as monthly payment without worrying about the interest rate hikes in the future.

For Dealing with Debts

There are several homeowners who refinance for consolidating debts. It is ideal to change high-interest debt with a low-interest mortgage at face value. Sadly, refinancing does not come with an automatic spell of financial cautiousness. As a fact, a considerable number of people who have high-interest debt simply end up raising the debt after mortgage refinancing liberates them to do so. As a result, an immediate loss is experienced in terms of wasted refinancing fees, equity in the house, and extra interest payments on the new loan. So, one should not take this undue advantage of mortgage refinancing for it to be successful.

About the Author: Mary Carnegie is a senior broker who is working at a famous American mortgage company. Currently, she is working hard to be a part of a recognized finance company such as Network Capital Funding Corp. She is available on twitter @maryjcarnegieor or https://twitter.com/maryjcarnegie.

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