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Know when to refinance
It's important to have a clear objective in mind when refinancing. Here are the most common reasons homeowners refinance. Which one is right for your situation?
Lower Your Mortgage Payment
Who doesn't want a lower monthly payment? There are two ways refinancing can lower you payment. The obvious one is to simply refinance at a lower interest rate. In fact, a drop of just a half to three quarters of a percent can lower your payment.
You can also change the term on your mortgage to lower your payment. Switching from a 15- to a 30-year term can significantly lower your payment. But, if long term savings is more appealing, refinancing from a 30-year to a 15-year can save you thousands of dollars over the life of your mortgage.
Convert An Adjustable Rate Mortgage to a Fixed-Rate or vice versa
Homeowners with Adjustable Rate Mortgages (ARM) should consider refinancing to a fixed rate or even another ARM when or before their interest rate is set to adjust if current fixed rates are favorable. You might want to consider refinancing to an ARM if you're planning on being in the home for only a few years. There's no sense in paying the higher interest on a 30-year fixed mortgage, when you can pay a lower rate for the few years you're living in the home. If you'll be in the home much longer than that, then it makes more sense to convert to a fixed rate loan.
On the flip side, if you already have a fixed-rate mortgage and are considering moving within the next couple of years, you may want to consider refinancing to an ARM to save money. Converting from a fixed-rate mortgage into an ARM can lower your monthly payment initially and is ideal if you're planning on selling within the next few years.
Get Cash / Pay Off Credit Cards And Other Debt
Homeowners can refinance to access the equity in their home through a cash-out refinance. They use the money for all sorts of reasons: to pay off credit cards and other higher-interest debt; finance home improvements; pay for a college tuition; buy a new car; even go on vacation.
Because interest on credit cards is compounded and interest on a mortgage is simple, using the equity in your home rather than using credit cards to finance expensive purchases can save you money paid in interest in the long run. Plus, unlike credit card interest, interest paid on mortgages is most likely tax deductible*. And, that's an additional savings.
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