Have interest rates dropped since you purchased your initial home? Are you thinking about converting to a different type of mortgage loan? Have you improved your credit and think you qualify for a better home mortgage interest rate?
When one refinances their mortgage, it essentially means you are paying off your existing loan with a new one. There are multiple good reasons for taking a new loan, but there are also disadvantages. Refinancing requires an appraisal and title search. The total fees range between 3 percent and 6 percent of the principal borrowed.
There are two prime reasons for refinancing after you buy a home:
Rate and Term Refinancing: In this situation, one is trying to save money by lowering their interest rate or changing their terms (shortening the number of years).
Cash-out Refinancing: This is a loan in which one takes more than owed, cashing out the difference in the value and original loan.
Other reasons for refinancing include eliminating private mortgage insurance, divorce, and switching from an adjustable-rate mortgage to a fixed-rate mortgage.
Lower Interest Rate
Many mortgage companies and banks state that a rate decline of one percent provides sufficient savings to make refinancing worth doing. Lowering your interest rate saves money, but it also helps build equity faster.
Shortening your terms will pay off your loan faster and save you money. However, when combined with an interest rate decline, it is often possible to shorten the term without increasing monthly mortgage payments.
There are some real advantages to cashing-out equity. Interest and points paid on home mortgages are tax-deductible. In many cases, it makes sense to use your home's equity to pay off debts, college, or cover other major expenses.