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Mortgage refinancing is a financial tool that involves paying off an existing loan and replacing it with a new one. There are multiple possible benefits of refinancing your home loan, and when done right it can be an invaluable financial decision that can lead to increased savings. Read on as we explore how to determine when refinancing can be the right choice for you:
Securing a lower interest rate
One of the possible advantages of refinancing is to avail a lower rate of interest. Reducing your interest rate increases the rate at which your home builds equity, in turn helping you save money with lower monthly payments.
Shorten loan term
When interest rates fall, homeowners can refinance an existing loan for another loan that has a significantly shorter term.
Converting to ARM from FRM
While adjustable-rate mortgages start by offering lower rates than fixed-rate mortgages, periodic adjustments can result in higher rates. In these situations, converting to fixed-rate mortgage results in a lower interest rate and eliminates concern about future hikes.
On the other hand, if there is a fall in interest rates, switching from a fixed-rate mortgage to an adjustable-rate mortgage can be a good financial strategy that can reduce your monthly mortgage payments.
Tap equity or consolidate debt
Homeowners often use their home equity to pay for big expenses such as remodeling their homes or paying for their child’s college education. They may justify refinancing by saying it adds value to their home or lowers interest rates with certain homeowners refinancing to consolidate their debt.
At face value, replacing high-interest debt with a low-interest mortgage is a good idea but take this step only if you are convinced that you can resist the temptation to spend once the refinancing relieves you from your debt.
Bottom line
Refinancing can be a practical and effective tool if it helps reduce mortgage payment, shortens your loan terms, or helps you build equity quickly. It can also be a practical tool for reducing your debt and bringing it under control.
Always remember that while a savvy homeowner is always looking for ways to reduce debt, build equity, save money, and eliminate mortgage payments, taking cash out of your equity when you refinance may end up hampering those goals.
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