The Benefits of Refinancing a Mortgage

How can refinancing a mortgage benefit you? The answer to that question depends a great deal on your individual circumstances, but there are a number of different ways that a mortgage refinance can help you achieve your financial goals or otherwise make your life better. Whether you choose to refinance into a longer term or trade in your outgrown adjustable rate mortgage for a fixed rate mortgage, there are benefits to be gained from refinancing a mortgage.

Refinancing your mortgage can reduce your monthly payments.

One reason that people refinance their mortgages is to reduce the amount of money they pay out each month as a mortgage payment. There are several different ways to accomplish this. The one that you choose will depend upon your financial circumstances.

• Refinance into a lower interest rate. If your credit score has improved since you took out your current mortgage, you may qualify for a lower interest rate on a new mortgage. Your credit score or credit rating is fluid, and will change over time as you build up a history of making on time payments on various loans and credit accounts. Thus, if you’ve made a couple of years of payments on your mortgage and credit cards without defaulting on any loans or making late payments, your credit history could conceivably have improved enough to earn you a lower interest rate if you choose to refinance. Since you’ll have a lower interest rate, you’ll have a lower total mortgage amount, and likely a lower mortgage repayment.

• Refinance to lengthen the amount of time you have to repay your loan.Another way to reduce your monthly payment is to refinance your mortgage into one with a longer term. Most financial advisors would recommend against refinancing for a longer term, because it will nearly always increase the amount you’ll pay for your mortgage overall. If you’re in a situation where you need to reduce your monthly payment, though, refinancing to a longer term is preferable to defaulting on your mortgage.

For instance, if you refinance a thirty year mortgage for $150,000 at 5.04% to a forty year mortgage with the same amount and terms, you’ll reduce your monthly payment from $807 to $727 a month. Depending on the amount that you’ve already paid on your current mortgage, your monthly savings could be even greater. On the other hand, because you’re paying on the mortgage for ten years longer, you’ll end up paying considerably more in the long run. In the example given above, you’ll pay a total of $58,420 more in interest over the life of your loan.

Refinancing can reduce the amount of interest that you’ll pay on your mortgage.

Another reason that people opt to refinance their current mortgage is to reduce the amount of money that they pay in interest to the bank or lender. Naturally, you’ll pay less in interest if you can refinance to a lower mortgage rate, but it’s important to consider what it will cost you to refinance the loan. Closing costs and prepayment penalties on your original mortgage can reduce the savings you’ll see by reducing the interest rate you pay. In general, if you can get a mortgage with an interest rate at least one percentage point lower than you are currently paying – and if you’ll be staying in your current home for four or more years longer, you’ll save enough in interest payments to make it worthwhile to refinance.

However, you may also save money by refinancing to a shorter term, even at the same or a higher interest rate. While refinancing your mortgage for a shorter term will probably increase your monthly payment, it can save you a considerable amount of money for the overall cost of your home loan. If you refinance a 30 year mortgage for $150,000 at 5.04% to a twenty year mortgage for the same amount and same interest rate, your savings – outside any closing costs and pre-payment penalties – will be a whopping $52,200. If you can afford to pay the extra amount on your mortgage each month, you’ll probably benefit in the long run.

These examples are only rough estimates of the amount of savings you can realize by refinancing your current mortgage. Refinancing your mortgage isn’t for everyone, and you should look carefully at your circumstances before making the decision to trade in your mortgage for a new one with a lower monthly payment or a shorter or longer term of payment. If you do decide that refinancing your mortgage makes sense for you, be sure to shop around for the best rates available. Every lender is different, and you could save considerably just by getting quotes from several lenders and choosing the best one for you.
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