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If you're a conventional thinker, you might be one of those people who feels the only mortgage for you is a traditional 30-year fixed-rate mortgage. Fine. But you may also think once the loan has been closed, you shouldn't have to think--or worry--about it ever again. But, like everything, times change, and if you're still treating your mortgage the old-school way, then you're probably in for a big surprise. MYTH: YOU SHOULD NEVER REFINANCE YOUR MORTGAGE FALSE! Sure, there are times when you should leave your mortgage alone, but there are also times when refinancing could reap lots of rewards. Managing your mortgage wisely should be a part of how you manage your assets. Lowering Your Monthly Payment One of the biggest reasons many people refinance is to lower their interest rate which, subsequently, lowers their monthly payment. Let's say you got a loan with an interest rate at 7.5 percent; your loan amount was $100,000; and it's a traditional 30-year fixed. Your payment (without taxes and insurance) would be just under $700. Now, let's say rates have dropped down to 6.5 percent. If you were to refinance, your payment would drop to about $632. Now that you've refinanced, you're keeping nearly $70 more in your pocket a month that you could use toward other bills or just extra spending money. Over a year, that adds up to $840! Perhaps you can finally take that vacation to the Bahamas after all. Refinancing from a Fixed to an ARM Not interested in lowering your rate and payment? Fine. Let's say you have a home that you bought with a 30-year fixed-rate mortgage. But what if you have to move a lot? Many people in the military have to relocate themselves and their families quite often. This also goes for some people in sales where they get transferred often. Even if you don't have to move a lot, the average American family moves every seven to nine years. Keeping a 30-year fixed rate mortgage doesn't make as much sense in these types of situations as having a shorter-term adjustable rate mortgage (ARM) because the rates for a 30-year fixed are often higher which means you're paying more. Why pay more when you don't have to? Refinancing from an ARM to a Fixed Let's say you do have an ARM. Why would you need to refinance to a fixed-rate mortgage? Well, if rates are continually rising, as they were between 2004 and 2006, you'd want to keep your rate from increasing too high. Otherwise, you face increases in your monthly payment. In this case, you'd want to refinance to a fixed rate to avoid rising rates and payments. Getting Cash from your Home Whether you have a fixed or adjustable rate mortgage, there are times when it's prudent to refinance your mortgage. You might need to make home improvements or consolidate high-interest debt. Let's say there was a big storm that ripped through your neighborhood and now your roof is leaking. You realize you need to have the entire thing replaced. What do you do? Don't reach for that credit card, if you want to fix it. Credit cards carry higher interest rates than do mortgages and, unlike mortgage interest, you can't deduct credit card interest from your taxes. (Always check with your tax advisor.) Or what if you went through a financially hard time and now you have thousands of dollars of debt racked up on your credit cards. How are you going to pay off those bills? The better solution is to refinance your mortgage to get cash out of your home using your home equity. Essentially, you get a new mortgage to pay off your old mortgage and you have extra money (taken from your home equity) to pay for home repairs or improvements or to pay off your debt. Making home improvements has the added benefit of increasing your home value so that when you sell it, you can make a bigger profit. And paying off your debt can improve your credit so that when you need another loan, you can get better loan terms and lower interest rates. In fact, you could even use the money you get from your home equity to make a down payment on an investment home, thereby increasing your cash flow. The truth is that everyone's situation is different and you have to judge whether or not it's right for you to refinance your mortgage. There are times it makes sense and times it doesn't. Even if you don't think you should refinance, it's wise to contact an experienced mortgage banker to find out for sure.
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