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Reasons to Refinance

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Refinancing the terms of your home loan can be a great idea and can offer a variety of benefits, but it isn’t for everyone. It will depend on your specific situation and the current state of the market. Make sure you consider refinancing very carefully before going through with it. You should do plenty of research, and you should talk to an accountant about your options. That being said, here are some reasons that you might want to refinance your home.

To Lower Your Interest Rate

If interest rates in the housing market are low, you may be able to get a lower rate by refinancing. Refinancing, though, is almost always going to cost you some money, so this is only worth it if your interest rate decrease is going to be significant. If it’s not, refinancing may not save you any money. On rare occasions, refinancing is offered at “no cost.” If you have a fixed-rate loan and can refinance at no cost for a lower interest rate, you should take advantage of it. However, remember to assess the situation carefully before acting.

TIP: For more information on refinancing costs, check out our guide entitled "Costs Associated."

Switch to Fixed-Rate Interest

If you have an adjustable rate mortgage (ARM), you might benefit from refinancing to a fixed-rate loan. The interest rate for an ARM may (and usually does) go up significantly over time. If the market interest rates are very low, it might be beneficial to lock into an attractive fixed-rate. While you’ll no longer benefit if rates drop lower in the future, you won’t run the risk of your rate going up. Plus, you’ll be able to budget more effectively by knowing exactly what you’ll be paying toward your home loan each month.

Change the Length of the Term

There are two options in regard to changing the length of the loan’s term, each with different benefits and drawbacks. One option is to lengthen the term of the loan to lower monthly payments. If you’re looking for more cash flow on a monthly basis, this might be a good option. Be aware, though, that lengthening the term of the loan means you’ll be paying more in the long run, unless you increase your payments again in the future.

Conversely, you may have extra cash lying around and can afford to pay more each month. If this is the case, shortening the length of the loan is probably a good idea. You’ll save money in the long run by paying interest over a shorter period, and you’ll be free from the loan sooner. Additionally, interest rates are usually cheaper for shorter mortgage terms.

Planning to Sell Your Home in the Near Future?

If you plan on selling your home in a couple of years, refinancing can be a way to avoid paying long-term interest rates (which are usually higher) for a home that won’t be yours long-term. You could refinance to switch to an ARM, which minimizes early payments. If you end up moving, though, you’ll have put yourself in a bad position, so don’t make this decision lightly.

Refinancing your home loan can certainly give you some financial options, so it’s a great thing to consider doing. Don’t be afraid, though, to stick with your current loan terms; you may already have your best option.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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