Reasons to Refinance a Home Mortgage

There are many reasons to refinance a home mortgage but many people do not quite understand the process and how refinancing works. For those that do understand the process of refinancing, you know that there are fees involved and that it takes time for the refinancing to ‘pay for itself’. The idea behind refinancing is knowing when to refinance, good reasons to refinance and how to figure out how long it will take for the refinancing to pay for itself.

When you refinance a home mortgage, there are fees involved from the lender that are associated to the mortgage. These fees are similar to the fees you paid with your original mortgage and can include closing fees, administration fees and even appraisals on your home.

One of the chief reasons to refinance a mortgage is lowering interest rates. If your mortgage is sitting at 6.75 per cent interest and the current interest rate on a mortgage is 4 per cent, it may be wise to look into refinancing your mortgage to take advantage of the much lower interest rate. A lower interest rate will save thousands of dollars on the interest payments throughout the term of the mortgage and easily pays for itself in no time at all. However, if you are planning to sell your home within the near future, this effort of refinancing is fruitless as it will likely take more than a year to ‘pay for itself’. However, if you have no plans of moving in the close future, then it is wise to refinance to take advantage of considerably lower interest rates so you can observe the savings of thousands of dollars of interest payments.

One of the other most popular reasons to refinance is to change from an adjustable rate mortgage to a fixed rate mortgage. If you have an adjustable rate mortgage and the trend of interest rates has been steadily inclining, it may be wise to lock in a new, fixed rate mortgage with the current interest rate before it continues to rise higher.

Refinancing your mortgage can also be done to extend the amortization of your mortgage and thusly lower your monthly payments. The main reason people want to lower the payments on their mortgages is to use the money they save monthly on renovations and improvements to their home. Using refinancing for improvements is an excellent idea, because the improvements and renovations will increase the value of your home on the market.

You can also refinance your mortgage to get some cash out of the equity you have built in your home by making payments. The cash is often used for paying medical bills, doing big renovations, vacations, or paying for college education. You can also refinance to consolidate other debts you have, such as loans and high interest rate credit cards.

Regardless of your reasons for refinancing, it’s important to find out how long it will take you to make the refinancing pay for itself. You can do this by taking your old mortgage payment and subtracting your new mortgage payment—the result is the savings you have each month. Take the cost of the refinancing and divide it by the savings—this is how many months it will take the refinancing to pay for itself. If you plan to move within that period of time—it’s best to look at other options, such as a home equity loan or home equity line of credit.