The basic concept of a refinanced mortgage is easy to understand. This approach calls for securing a loan that can replace the current mortgage loan. The proceeds from the new arrangement will completely pay off the balance of the old debt. Along with paying off the original mortgage, the strategy also allows the debtor to benefit in other ways.
The decision to enter into a mortgage refinance is something that most homeowners think about from time to time. As with any type of financial transaction, choosing to refinance mortgage arrangements that are already in place must provide some type of benefit to the homeowner. Unless there is clear evidence that this action will produce significant advantages, the homeowner would do well to leave the current financing in place. Here are some examples of potential benefits that you could receive by choosing to refinance your existing mortgage.
Lock in a Lower Rate of Interest
One of the primary motivators for refinancing a mortgage is the ability to secure a lower rate of interest. While it is true that the flat rate that applies to your current mortgage was excellent when you first assumed the debt, things have changed. The economy has shifted somewhat and the average interest rate for home lending has decreased noticeably. Assuming that the difference between today’s average rate and the rate that applies to your current mortgage is significant, refinancing could save a great deal of money.
Keep in mind that many homeowners will refinance as a way to deal with average interest rates that are anticipated to rise. For example, your current mortgage may have a floating rather than a fixed rate. Chances are the mortgage came with a competitive fixed rate that applied for the first seven to ten years of the mortgage term. If that period is about to expire and you believe the adjustable rates that will apply for the rest of the mortgage will be much higher, you may want to refinance and lock in a lower flat rate before the economy shifts yet again.
Keep in mind that there is more than one reason to refinance mortgage rates. The key is to determine if refinancing will help you keep the interest you pay on the debt lower over the life of the loan. If so, then talking to a few lenders about refinancing is worth the time and effort.
Lower Your Monthly Installment Payments
Another reason to refinance your current mortgage is to adjust the amount of the payments you make each month. Debtors who were making more money a few years ago often find that continuing to make the same payments even though they have less money coming in creates problems with the household budget. Assuming you can secure refinancing that includes a lower rate of interest and allows you to lock in a longer term will result in lower mortgage payments. As a result, there is less stress on the household budget and you can meet all your obligations with greater ease.
While this approach does mean it will take longer to retire the debt, the ability to live within your means and maybe even save a little money for emergencies means that you enjoy a higher level of financial security. In this day and age, that’s a very good reason to consider refinancing.
Consolidate Two Mortgages
If you happen to have a mortgage on your primary residence and a second property that you use for weekends or vacations, take a good look at the cumulative amount that you owe on both debts. You may find that the assessed value of one of the homes is now enough to cover that current combined debt. If so, you can obtain refinancing that will pay the remaining debt on one property and maybe even provide better terms than either of the older mortgages provided.
What this strategy does is eliminate one of your debts completely. At the same time, negotiating terms that add a few more years to the term of the refinanced loan combined with better interest rates could mean that the installment payments on the new loan are easier to handle that the two debts that it replaces. This allows you to have more money available to invest in the maintenance of both homes or to use in any other way you see fit.
You Need Cash for Other Projects
As every homeowner knows, there are all sorts of expenses associated with maintaining a home. The heating and air conditioning system may need replacing or the time may be at hand for a new roof. All these types of projects can be extremely costly. While you could try to obtain a separate loan using the equity in your home as collateral, why not simply refinance the mortgage and avoid creating one more debt obligation?
This same strategy can also apply when you have other obligations to consider. For example, you can use this approach to borrow a little more than what you currently owe on the house and use the funds to consolidate all your other secured and unsecured debts. Choosing this strategy will allow you to settle all those debts and free up more of your income each month. At the same time, the fact that those debts are paid in full will look quite good on your credit report.
Assuming that the refinanced mortgage comes with a lower interest rate, you may not see that much of an increase in the amount of the monthly installment payments. In fact, the funds you were using to make the minimum payments on those now retired debts will likely cover the cost of the increase and still leave you with a little extra. This reorganization of your debt load could increase your financial security while allowing you to avoid the creation of another debt to include in the monthly budget.
Before deciding that a mortgage refinance is definitely the way to go, identify how this financial strategy would benefit you. Consider the costs of the refinance and make sure that the level of benefits you would generate is worth the time and effort. If it is apparent that refinancing would definitely improve your financial outlook, talk with a few lenders and see what they can do in the way of rates and terms.