Refinancing your Mortgage - What You need to know

There are a host of reasons why you might want to refinance your current home loan, however most people refinance for the following reasons.

  1. To reduce their monthly mortgage payments
  2. To consolidate outstanding debt (such as combining a first and second mortgage)
  3. To tap built-up equity in their homes
  4. And some simply want to change their mortgage situation (i.e. moving to a more stable product such as going from an adjustable rate mortgage to a fixed rate mortgage.

Whichever reason fits your personal situation, there are certain basic rules you must follow to achieve your goal. Straying from some of these basics can end up costing you time and money. (continued below)

When is the right time to Refinance?

The rule of thumb regarding mortgage refinancing  that you should not refinance until rates are such that you can get an interest rate at least 2% below the interest rate you currently have is not exactly accurate.  For some people, as little as one-half of one percent can be enough to provide worthwhile savings if all other factors fall into place.  The only way to determine whether refinancing your mortgage is for you is to analyze the time and the cost factors.

How long do you plan on holding this Mortgage Loan?

You might have a mortgage loan product that demands refinancing -- like a balloon mortgage. But  if you don't have to refinance your mortgage, your time frame can be as long as you plan to stay in your current home. When determining your time factor, it's important to be realistic, since the time factor will determine if and when you begin to save money. Refinancing can cost a considerable amount of money, so you'll want to be as certain as possible of your time frame.

Cash out Refinance or Home Equity Loan

If freeing up cash is your goal, there's a way to do so, without refinancing: taking a home-equity loan. Home equity loans are an alternative, although they are not without their own drawbacks. Most Home Equity loans are of the adjustable-rate, revolving 'line of credit' type, (but most don't have per-adjustment interest rate caps, and some have lifetime caps of as much as 25%). There are fixed rate home equity loans available too, and they function much like any first or second mortgage does, but will cost you more than a line of credit.

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Mortgage Types
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