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Lower Interest Rates
One of the main reasons homeowners refinance is to take advantage of lower interest rates. For example, if you have a fixed rate mortgage and the interest rates have declined since you obtained the loan, you may want to consider refinancing for a lower rate. Generally, you will want to wait until you can lower the rate at least 1 1/2 to 2 percent. For example, let's say you purchased your home with a 9% rate 2 or 3 years ago. At today's rate of 6.75%, you would save a significant amount of money off your monthly payment each month. On a loan of $100,000 you would save $156.03 per month!! Could you use that extra money? Of course, there are other factors to consider. If you are planning on moving within the next year or two, it may not be worth the costs involved. You would need to see how much the cost would be and make your decision based on how long you plan to stay in the house and how long it would be before you broke even. Let's say your cost of the refinance was $3000.00. Divide that by your savings of $156.03. It would take you a little over 19 months to break even on the loan. Of course, you would also want to consider that most of the costs involved can be rolled back into the loan itself, so you would have very little out of pocket expense.
Build Equity Faster
Another reason to refinance is to build your equity faster. Many homeowners want to build equity in their homes faster and choose to refinance in order to shorten the term of their loan. For example, from a 30 year loan down to a 15 year loan. Let's take same $100,000 loan at 9%. The principal and interest payment would be $804.62 for 30 years, but on a refinance for 15 years at 6.75%, the payment would only be $884.90. A difference of only $80.28 per month and you can pay off your loan in half the time.
Switch from an Adjustable Rate to a Fixed Rate
During the times when interest rates were higher homeowners sometimes chose an adjustable rate over the fixed rate because adjustable rates can be so much lower. Also an adjustable rate can get you into a larger home right away, sometimes homeowners will choose the ARM because they know that their income will be increasing significantly over time. Many people will want to refinance when they see the rates start going up! Personally, I prefer a fixed rate so I know it can't go up.
Draw on Equity Already Built Up
A homeowner may want to refinance and get cash out with a refinance. In this way, you can tap into the equity already built up in your home. This is especially nice if you are refinancing for a lower rate to boot! You can use this money for college, home improvement or debt consolidation. For that matter, you could take a trip to Tahiti!
Cindy Snyder is the owner of Creative Mortgage Company in Irmo, SC. Visit her website at http://www.creativemortgageco.com/
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