Advantages of Refinancing a Home Loan 

When refinance a home loan you are essentially taking out a secured loan to pay off your original mortgage using the same property and assets. There are some drawbacks to refinancing but many advantages exist, depending on your situation.

A great reason to refinance your home loan is to decrease the interest rate on a fixed interest rate mortgage that was set during a period of higher rates. If the interest rates are now lower, refinancing can save you a considerable amount of money in the long run and lower your monthly payments. You can also refinance to avoid an upcoming interest rate increase on your ARM (Adjustable Rate Mortgage) by opting for a fixed rate or getting into another ARM loan program. Just remember that there are fees associated with refinancing so be sure to calculate your losses against any potential savings. Make sure the amount saved will offset these fees.

Refinancing may be used to shorten the term of your loan. If you have been paying for a few years on a 30-year mortgage you may be able to refinance for a shorter term of 10, 15 or 20 years. This, combined with a lower interest rate, can save you thousands of dollars reflected in a lower monthly payment and fewer payments. If you take this option and still maintain your current monthly payment, more of your future payments will go towards the principal of the loan. This builds up equity faster and will pay your loan off earlier.

“Cash out” refinancing is a way to get money in your pocket now to use for remodeling, bills, college or other expenses. You will refinance your home for an amount higher than your current principle balance which may increase your monthly payment or lengthen the repayment period. If you able to lower the interest rate enough – you might be able to avoid increasing your payment and/or lengthening the repayment period. Keep in mind that most banks will only refinance your home to 90-95% of its value.

For many, refinancing their home is an excellent way to lower monthly payments and interest rates, decrease mortgage payback periods and get extra cash. On average, closing costs on a home refinance range between 1 and 5%. Before you decide to refinance your home be sure to seek expert advice from a few loan specialists to make sure that your savings outweigh the associated costs. In addition, shop around for the best loan program and be sure to pay attention to interest rates, prepayment penalties and associated fees.

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