There are five major reasons to consider refinancing an existing mortgage:
* Decrease monthly payments from a higher fixed rate to a lower fixed rate.
Example: If the rate is 7.5% now and a homeowner switches to a 6.5% rate, he or she will save 1% on the mortgage less the costs of refinancing. On a $200,000 mortgage, for example, the savings will be over $50,000 over 30 years by reducing the interest rate by just that one percentage point.
* Improve monthly cash flow with lower payments.
Cash flow may be tight after moving into a new home. Switching to an adjustable rate program where the rate is fixed for the next three to ten years could provide breathing room needed. Similarly, for those who are in a 15 or 20 year term loan, switching to a 30 year term can also increase monthly cash flow.
* Switch to a fixed rate program to eliminate payment changes of adjustable rate mortgages (ARMs).
Homeowners with one year ARMs will see their rates rise as rates move up. Using programs that hold rates steady for three, five or seven years, you can refinance into a low fixed rate.
* Withdraw funds from the equity in a home.
If cash is needed for home improvements, college education or to consolidate debts, the borrower may be able to refinance 75% to 80% of the current value of the home if it has been owned for one year or more.
* Shorter loan terms
Probably the best incentive to refinance is found by refinancing into a shorter term loan while keeping the loan payment stable. A borrower can save tens of thousands in interest by reducing the term of the loan.
Refinance Costs Lower Than Ever
The costs of refinancing have decreased greatly in the past several years. Using no cost out of pocket loans, for example, borrowers can save thousands of dollars up front. Also, closing costs can usually be included in the new mortgage loan amount so that no cash is required to execute a refinance.
Paying Points for a lower interest rate is an excellent idea if you are staying in the property more than 4 years.
Deciding whether to refinance usually involves totaling the costs of refinancing and subtracting those expenses from the total savings expected. It is also important to determine how many months it will take to pay back the costs of refinancing from the savings that will accrue.
The savings that can be obtained from refinancing depend directly on the answers to the above questions. It is best to answer these questions with the help of a qualified mortgage professionals.