When to Refinance a Home Mortgage

Is it always a good idea to refinance your home mortgage when interest rates are low?  This article discusses the pros and cons of refinancing according to individual homeowner’s financial circumstances.  In-depth financial considerations are discussed.

Historically low-interest rates are creating a surge in mortgage applications, and home refinancing is currently accounting for a large percentage of the application total (Mortgage Bankers Association). Many homeowners are taking advantage of low-interest rates and finding themselves with more money in their pockets. “When a borrower refinances, it’s a mini-stimulus, because they have more money to spend,” says Carolyn Kemp, spokeswoman for Mortgage Bankers Association.

Is refinancing a mortgage at extremely low rates always a good deal? Check the pros and cons of refinancing a home mortgage and consider individual financial opportunities and situations.

Refinancing May Be a Good Choice

  • Homeowners wish to save money with lower monthly payments. Monthly payments are reduced with a lower interest rate or if the length of the loan is increased.
  • Homeowners want to eliminate debt faster by paying off their mortgages quickly. Monthly payments increase, but homeowners save in the long run on overall interest payments on the debt.
  • Extra cash is needed to pay off credit card debt or other loans. Mortgage interest is tax-deductible, while credit card and other loan debts are not.
  • Homeowners would like to consolidate two loans into one. If there is enough equity in the home, homeowners can combine loans into one loan. This situation is usually a better debt solution than combining payments on a first and second mortgage.
  • Conversion of an adjustable-rate mortgage (ARM) into a fixed-rate mortgage (FRM). Staying in an ARM, subjects a mortgage to variable interest rates, while obtaining an FRM allows homeowners to lock in at a lower rate for the life of the mortgage.
  • Homeowners want to eliminate private mortgage insurance (PMI). Homeowners no longer have to pay PMI payments if the current loan balance is below 80% of the new appraisal for the home.

Refinancing May Not Be the Best Choice

  • The majority of the mortgage is already paid. Closing costs will offset gains in lower interest rates.
  • Home value has gone down. A new loan might not pay off the existing loan if a homeowner refinances up to 80% of the reappraised value and the original mortgage is higher than this amount.
  • Homeowners have been diligently paying their first loan for an extended period of time. Refinancing may increase the overall payment if a homeowner has been paying an existing loan for an extended time period.
  • Homeowners have used up a substantial amount of home equity. If homeowners have used up 90% or more of the home’s value they won’t be able to procure the best market rates for a refinance. Lenders will charge higher rates because they believe that borrowers have less to lose if there isn’t significant equity in a home.

Now is the time to act on low-interest rates if a homeowner’s financial situation warrants a refinance of their home mortgage. Learning the pros and cons of refinancing a home mortgage empowers homeowners to act in their best financial interest by taking advantage of the best deal for their situation.

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