The Perks of Refinancing

Posted by  on Apr 16, 2009
There is a nasty and uniformed rumor that refinancing is a bad decision. Some believe only the traditional thirty-year mortgage fixed interest rate plan is secure. Some also believe that once a loan has been closed, you shouldn't have to think about it ever again. But, like everything, times change, and if you're still treating your mortgage the old fashioned way, you are probably in for a big surprise.

Agreeably, 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.

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.

Imagine 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 because the rates for a 30-year fixed are often higher which means you're paying more.

What if you already have an adjustable rate mortgage? 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.

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.


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