Refinancing your mortgage can help you reduce your other debts, save you money or even put cash in your pocket.
There are many ways you can refinance your mortgage, or use your home as collateral to get cash using the equity in your home.
If you are considering refinancing your mortgage, you first need to determine if doing so will help you – both now and in the future – and if right now is the most advantageous point in time to do it.
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A refi loan allows you to pay the remaining balance on your mortgage at a lower interest rate and spread the payments out over more years. The goal is to have a more affordable mortgage payment.
The ideal time to do a Traditional, or rate-and-term refinance is when the interest rates are lower than they were when you originally financed. This decrease could be due to changes in the prime interest rate, as a result of you building a better credit rating or because you have chosen your lender more wisely.
There may be other times when this type of mortgage refinance is a good idea, too. For example, your expenses may suddenly increase. You may have large, unexpected medical bills you need to pay or you might take in your elderly parents and incur additional expenses caring for them. Whatever the reason, if you can make a mortgage refi work, you can ease the burden of too-high mortgage payments.
15 year refi
A 15 yr refinance loan is a good option for people who want to get a lower rate to pay off their mortgage quicker. A 15 year mortgage will have higher payments than a 30 yr mortgage but in the long run it will save you money. If the interest rates are low, like they are now, you could save tens of thousands of dollars over the course of the loan by refinancing to a lower rate.
30 year refi
A 30 yr refinance loan is a good option for someone who is looking to reduce their monthly payments. Refinancing your existing mortgage into a 30 year loan could save you hundreds of dollars a month.
With a cash out refinance you can turn the equity on your home into cash. You can use the cash to pay off other debts, such as credit card debt, with the additional money over what you owe on the house. Another option is to take the extra cash yourself to use as you prefer.
There is some risk associated with a cash-out refinance. First, if you are sending the extra cash to pay off credit cards, you are trading those unsecured debts for your secured mortgage debt. That means that not only do you have to deal with collectors if you miss a payment, but now you also have to worry about losing your home.
At the same time, if you are doing a cash-out mortgage refinance to pay off large credit card balances with high interest rates, you might be able to save money if the mortgage interest rate and term of the loan is advantageous. Rather than going into a cash-out refi unprepared for possible disadvantages, it is always a good idea to calculate the break-even point and only settle for a refinance loan that gives you a better deal. A simple form of this calculation is your total closing costs divided by your monthly savings.
Home Equity and HELOC Loans
A HELOC loan, or home equity line of credit is a loan that uses your home as collateral. You can borrow up to a certain amount and you only pay interest on the amount that you borrow, it is very similar to a credit card. During the draw period, which is typically the first 5-10 years of the loan, you can repay interest only, or you can pay it off at any time without a pre-payment penalty.
The HARP Program
The home affordable refinance program was created to help homeowners who have little to no equity refinance to get a lower payment. HARP has low credit score requirements, in some cases a score under 620 can still qualify for HARP. If you are underwater on your mortgage or have little to no equity, a HARP loan is a great option.
FHA Streamline Refinance
Homeowners with FHA loans can refinance with the FHA Streamline refi program.This refinancing option allows you to refinance your home more easily. You do not need to have a credit check or income and employment verification. The loan goes through more quickly with less hassle for you. Because there is no credit check you can refinance your home with bad credit.
Reasons to Refinance Your Mortgage
While rate-and-term refinancing and cash-out refinancing are the two most common types, there are other reasons to refinance your mortgage. Fortunately there are options to refinance your mortgage with bad credit.
For example, if you have an adjustable rate mortgage (ARM), you might benefit from moving into a fixed mortgage loan.
If your original mortgage was insured by the FHA, you might refinance to a conventional loan to avoid paying PMI.
Refinancing can lower your interest rate and your monthly mortgage payments.
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