Mortgage refinance: The right mortgage can help you reach your goals

Posted by  on Oct 31, 2014

Mid-October saw 30-year mortgage rates drop below 4 percent for the first time since mid-2013. Understandably, this touched off a flurry of refinancing activity. You may be eager to join in -- but refinancing the right way is just as important as refinancing when rates are low.

The Mortgage Bankers Association reported that refinance applications surged to 59 percent of all mortgage activity in mid-October. This percentage had bottomed out at 49 percent last May. Clearly, the latest drop in mortgage rates has made refinancing more attractive, but to get the most out of refinancing, it is important that you choose the right kind of mortgage loan for your situation.

The first step toward choosing the right loan is to get your priorities straight -- deciding what you most want to accomplish by refinancing. The following are some examples of how the priority determines what type of mortgage loan you should consider.

  1. Capturing lower interest rates. This is the most straightforward reason for refinancing. For example, if you have a loan at 5 percent and you can now get a rate that is close to 4 percent, you can do an apples-to-apples replacement of your mortgage and save money. The only thing to remember is that if you are already several years into your existing mortgage, a shorter mortgage might be a better match for the payment schedule you have remaining -- and a shorter mortgage will allow you to save even more on interest too.
  2. Accelerating mortgage repayment. Do you want to pay off your mortgage in fewer years? Rather than simply making accelerated payments on your existing loan, you may be able to save more on interest if you switch to a shorter mortgage. If you are comfortable about being able to pay the loan down quickly, you might even consider an adjustable-rate mortgage, because these offer a greater initial interest rate savings, and your shortened time-frame will reduce the risk of interest rate resets.
  3. Minimizing total interest expenses. If your goal is simply to reduce the total dollar figure you will pay over the life of the loan, use a mortgage calculator to figure out what is the shortest loan you can get while still affording the monthly payments.
  4. Accessing home equity. If you have built up a substantial amount of equity in your home but need cash for a special project or unusual expense, a cash-out refinancing may well be the cheapest form of borrowing available.
  5. Making monthly payments more affordable. Having trouble fitting your mortgage payments into the monthly budget? Then lengthening out your mortgage should reduce your payments -- especially when rates are this low.

The record low mortgage rates seen in recent years were largely a function of an aggressive Federal Reserve program to drive long-term rates down. When the Fed started to phase out that program, it was expected to spell the end for super-low rates. So, this latest drop is something of a surprise. Think of it as a second chance for people who did not get to refinance the last time rates were this low.

This kind of chance might not come again. Therefore, it is important not only to consider refinancing now, but to have your priorities straight so your refinancing takes the form that will do you the most good.


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