By Richard Barrington
The Top Ten Reasons to Refinance Your Home, Regardless of If You Have A Poor Credit Mortgage
Mortgage Credit Problems Columnist
Whenever mortgage rates fall, refinance activity picks up as borrowers seek better terms on their home loans. Lowering a mortgage interest rate is an important opportunity, but it is only one of many reasons why a home owner may want to refinance.
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Here are ten top reasons for refinancing:
- To lower the interest rate. The deserves to be number one, because it is the best reason of all. If you can lower your mortgage rate meaningfully, then you can save money month-to-month and over the full term of the loan. Even if rates have not dropped, you might get a better deal of your credit has improved or you have built up some equity in the property.
- To lock in the interest rate. You may have started with an adjustable rate mortgage, but when interest rates are near historical lows, it generally makes sense to refinance to a fixed rate mortgage and lock in an attractive rate.
- To lower payments by lengthening the term. Be advised that this can cost you money in the long run, but if spreading payments over a longer period improves your cash flow it can be a valid reason for refinancing. And you always have the option of paying more when you can afford to do so.
- To reduce interest expense by shortening the term. On the other hand, if you are meeting monthly payments with ease and have built up a little extra cash, consider shortening the term of your mortgage. This could save you money in two ways -- you'll be paying interest over a shorter period, and rates on shorter mortgages are generally lower than on longer ones.
- To smooth out balloon payments. If you used an option payment or interest-only loan to lower the early payments on your original mortgage, you could now be facing some mammoth "make-up" payments. It may be wise to refinance to spread these over a longer period.
- To adjust to short-term plans. If you are certain of selling your house in a couple of years, why pay long-term interest rates for what is in effect a short-term loan? This is where a loan structure like an ARM that minimizes early payments makes the most sense.
- To upgrade the home's value. Refinancing a mortgage and taking out a little extra principal can be smarter than a home equity loan--if you can improve on the terms of your existing mortgage, and if you put it into home improvements you will be reinvesting that money in your home's value.
- To make the home more energy efficient. Similarly, putting money into making the home more energy efficient can pay off over time in the form of lower utility bills. There may also be tax incentives or rebates from your local or federal government.
- To access money for education. Be wary of borrowing long-term to finance short-term expenses, but for a lifetime investment like education, it can be a smart move.
- To consolidate more expensive debt. If you access equity by refinancing so you can pay off other debts, you can reduce your interest rates and improve your cash flow. Take this opportunity to reform some bad habits and resist the temptation to run your cards up again.
Whenever you consider refinancing, consider these three principles:
- Be sure to account for all closing costs and fees when computing the expense of refinancing.
- In general, the more you shorten your loan and build equity, the cheaper your expenses and the greater your flexibility will be in the long run.
- Always budget before you borrow. Never take out a home loan unless you feel comfortable about meeting the monthly payments for the entire term of the loan.
Refinancing confers different benefits at different stages in your life. It's a good idea to take stock periodically, get refinancing quotes, use a refinance calculator, and see if a mortgage refinance can improve your situation.