Refinancing

Lowering your interest rate is probably the most popular reason to refinance. It could be that interest rates have improved, or maybe your personal situation has improved in the areas of your credit score, equity in your house or income. Whatever the reason, you now qualify for a mortgage with a lower interest rate saving you money over the life of the loan.

Moving from a 30 Year Fixed to a 15 Year Fixed could be one of the best financial decisions a borrower could make. For example, by refinancing a $400,000 loan with a rate of 4.5% with 28 years left into a 15 year at 3.5%, you would save over $180,000 in interest costs over the life of the loans. That is not a typo. One caveat – while the interest rate often drops, the monthly payment is usually higher, and you need to be comfortable with the higher payment.

Sometimes, it’s the other way around. You have a short-term mortgage to save on interest costs, but because of changing circumstances, you are finding it difficult to service the steep payments. In this case, moving from a 15 Year Fixed to a longer term like 20, 25 or 30 Year mortgage may be a better idea. You will save on your monthly payment and get the breathing room that you seek.

If you have an Adjustable Rate Mortgage (ARM) and are getting worried about the future rise in rates, moving to a Fixed Rate Mortgage (FRM) may be a good idea. This is recommended if you plan to keep the mortgage for a very long time. Since FRM rates are still at historically low levels, locking in a low fixed rate for the life of the loan gives you the peace of mind and a good night’s sleep.

If your ARM loan is nearing the adjustment period and you are not planning to keep the loan for a long time, moving into another ARM will save you on interest costs. Five and seven Year ARM rates can be 1% lower than fixed rates. It makes sense to save on lower monthly payments and save on interest cost by moving from your ARM to another ARM.

If you are currently paying mortgage insurance and your home prices have gone up, you have paid down enough on your principal, you are at a point where you have 20% equity in the house, or you can bring in some money to gain 20% equity in the house, it’s time to get rid of that pesky mortgage insurance.

Whether you want to renovate your house, payoff other debt (like auto loans, credit cards or student loan), or maybe you have a child going to college, doing a cash-out refinance may be the smartest way to finance those expenses. Mortgage debt is typically your cheapest form of financing, making it a less expensive option than borrowing from somewhere else or breaking into your retirement nest egg.