Gearing for a Better Deal

A refinance mortgage to your present loan might sound great if you’ve heard neighbors talking about getting a good deal after having a refinance. At present, however, there is no one-size-fits-all answer in making sense in your refinancing decision.

If the amount you save monthly will eventually surpass the closing costs in refinancing, taking out a new loan might be a wise move.

You might get the best deal if you compare offers from many lenders. Once you found it, you will want to lock in the rate in order to ensure you are not stuck with higher interest fees at the closing date.

It is likewise understandable that people resort to refinancing because of many particular reasons. Here are some of the popular ones.

Falling interest rates

This tops the many obvious reasons to refinance mortgage. When interest rates fall, a new loan can mean lower financing costs. For instance, you have a 30-year fixed mortgage when rates are at 6% and down at, say, 4.5%.

On a $300,000 loan, the rate drop will reduce your monthly payment to $279. However, you need to consider that taking on a new loan would mean paying new closing costs. The rate drop may be worth it, depending however on how long you will live in your home.

Replacing ARM (adjustable rate mortgage)

Another good reason to refinance mortgage is if you want to convert ARM into a fixed-rate loan.  The ARM is one loan that offers introductory low interest rates that is at rest after a pre-determined time period. If the rates have shot up after the resetting, you’re in for some very high monthly payments.

Borrowers usually go for refinance into a fixed-rate before the ARM reset date comes. Opting for safe bets (nobody knows the new rates will be) is a good option. (Costly ARM resets have caused the meltdown in the past.)

Credit score

You might have taken your loan when your score was a lot lower than now and cause higher-than-average interest rate. Since then, you might have developed better financial habits.

Your ability to pay back the loan on time is one of the biggest factors for improving your credit score. With it, you might be eligible for a better rate.

Stretching the loan term

Borrowers sometimes opt for lowering their monthly payments by simply taking out a new loan with a longer term. The payment might be lower, although it means tacking in another 10 additional years into the loan.

You can extend your loan if you are having trouble keeping up with your payments. You need to know, however, that you will be paying more interest in the long run.

Taking cash

Owning real estate also means the opportunity to build equity over time. One way is to refinance with a bigger loan, leaving you with extra cash that you can use.

To do that, you will need to stay within the loan-to-value (LTV) threshold for your loan program. This is the amount of the mortgage divided by the appraised value of your property.