What You need to know
There are a host of reasons why you might want to refinance your current home loan, however most people refinance for the following reasons.
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To reduce their monthly mortgage payments
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To consolidate outstanding debt (such as combining a first and second mortgage)
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To tap built-up equity in their homes
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And some simply want to change their mortgage situation (i.e. moving to a more stable product such as going from an adjustable rate mortgage to a fixed rate mortgage.
Whichever reason fits your personal situation, there are
certain basic rules you must follow to achieve your goal. Straying from some of
these basics can end up costing you time and money. (continued below)
When is the right time to Refinance?
The rule of thumb regarding mortgage refinancing that you
should not refinance until rates are such that you can get an interest rate at
least 2% below the interest rate you currently have is not exactly accurate. For
some people, as little as one-half of one percent can be enough to provide
worthwhile savings if all other factors fall into place. The only way to
determine whether refinancing your mortgage is for you is to analyze the time
and the cost factors.
How long do you plan on holding this Mortgage Loan?
You might have a mortgage loan product that demands
refinancing -- like a balloon mortgage. But if you don't have to refinance your
mortgage, your time frame can be as long as you plan to stay in your current
home. When determining your time factor, it's important to be realistic, since
the time factor will determine if and when you begin to save money. Refinancing
can cost a considerable amount of money, so you'll want to be as certain as
possible of your time frame.
Cash out Refinance or Home Equity Loan
If freeing up cash is your goal, there's a way to do so, without refinancing: taking a home-equity loan. Home equity loans are an alternative, although they are not without their own drawbacks. Most Home Equity loans are of the adjustable-rate, revolving 'line of credit' type, (but most don't have per-adjustment interest rate caps, and some have lifetime caps of as much as 25%). There are fixed rate home equity loans available too, and they function much like any first or second mortgage does, but will cost you more than a line of credit.
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