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Reasons To Mortgage Refinance
from: Mortage & Debt FactsThere are different reasons to seek a mortgage refinance. You can use a mortgage refinance to cash out equity in your home. This can keep you staying in your home while making needed home improvements. Or, you can use the money for other things like to pay off college expenses for your kids. Most people looking to mortgage refinance these days are doing it because they are stuck in an adjustable rate mortgage where the interest rate has reset or is set to reset. Some of these borrowers will find that they can refinance their mortgage and others will that either their situation, the local real estate market, or prepayment penalties will block this avenue. However, mortgage brokers are still trying to get people qualified, so it doesn’t hurt to try.
Lower Interest Rates
Another key reason people attempt to mortgage refinance is to lower their interest rates. Even with fixed interest rate loans, if the new rates available are at least one point less than the old one, it can be a good reason to look into refinancing. You do have to pay closing costs, which can add up to thousands, however if you intend to stay in your home a shift in your interest rate can easily make up for the closing costs, especially if the spread is wider between the old and new rate.
The uncertainty of Adjustable Rate Mortgages (ARMs) is also important when seeking a lower rate. If you refinance from a fixed to an ARM, the interest rate will eventually climb back up. However, if you have an ARM and find a lower rate on a fixed rate mortgage, this can be one way of locking into a much more attractive interest rate for the long term.
Modifying Terms
Lastly, the mortgage refinance can be a way to modify the terms of the agreement to opt for longer or shorter mortgage terms. Longer terms usually increase the amount you pay in your mortgage refinance but lower your monthly payments. Shorter terms typically increase your monthly payments but build up equity much faster and settle the loan quicker.
You can refinance a loan so that you are financing the home to take some of the equity out as cash. So, if you have 50% equity and want to take money out while modifying the terms of your loan, you can opt for a 40-year loan with only 20% down. That will give you 30% in equity to pay off closing costs and use the rest of the money for whatever else you want.
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