Why Should You Refinance Your Residential Mortgage?

Compare the closing costs and rates of at least three lenders.
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With excellent credit, a steady income and equity in your home, you may just have what it takes to refinance. To build equity quickly and make remortgaging worthwhile, choose a rate that’s at least 2 percent below your current rate. Watch out for prepayment penalties on your current mortgage, and don’t refinance if you may be moving within the next four or five years. Because closing costs are 3 to 6 percent of the cost of the loan, it takes time to hit the breakeven point.

Lower Monthly Payments

If you wish you had a little more money at the end of each month, refinancing to a lower rate can reduce your monthly mortgage payment. Ideally, choose a term equal to or slightly less than the number of years left on your current mortgage. Increasing the term will also lower your monthly payments but would increase your total interest payments. Determine your budget and find the best term and interest rate to meet your needs.

Lower the Term to Build Equity

Shorter terms, such as a 20- or 15-year mortgage, have lower interest rates than 30-year mortgages, but they also require larger monthly payments. But if you want to reduce the life of the loan and can swing larger payments, you can ultimately shave thousands of dollars off the total cost of the home loan. Use a mortgage calculator to determine what amortization schedule you can comfortably afford.

Consolidate Debt

Though you should first consider a home equity loan, refinancing to consolidate debt may make sense for you. If you have college loans, remodeling expenses or other debt, you could roll the debt into the mortgage. For example, if you owe $100,000 on your home and have adequate equity, you could remortgage your home for $130,000 to pay off other debts. Lenders allow qualified applicants to borrow up to 80 percent of the value of the home without having to pay for private mortgage insurance.

Convert to a Fixed Rate or ARM

If you worry about the rate of your adjustable rate mortgage increasing to an uncomfortable level, you may wish to lock into a fixed rate mortgage for peace of mind. Conversely, if you have a fixed rate but know you’ll be moving in the next five years, it may make sense to take advantage of a low ARM rate. Unless you live in a booming real estate market, use caution in assuming that you’ll be able to sell before the introductory ARM rate expires.

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