Mortgage Refinancing: how it can help you

Posted by Nick Niesen on October 29th, 2010

When people talk about refinancing their mortgage, they are usually talking about swapping their old mortgage at a high interest rate with a new mortgage at a lower interest rate. With rates lower on 15 and 30 year fixed rate mortgages by around a whole half a percent, many families have been taking advantage of rate refinancing. A half of a percent, or 50 basis points(.50), may not sound too significant, but when compounded out over a year, or many years for that matter, you can be looking at a savings of several thousand dollars or several tens of thousands of dollars. So you many want to inquire with you loan holder about refinancing if current rates are lower than the rate that is on your loan documentation.

Refinancing can also be used to do what is known as cash out refinancing. With this type of financial transaction, you need to have access to equity in your home. As an example, if you owe $100,000 on a $300,000 mortgage, you have $200,000 of equity. You can take out $200,000, pay off the remaining $100,000, and the use the remaining money for whatever you like, such as home repairs or additions. Whether or not you'll be able to take out a full $200,000 depends on the institution that you do business with.

In some instances you may be able to eliminate your private mortgage insurance premiums by refinancing. If when you took out a loan for your home, you were not able to come up with a twenty percent down payment, you could currently be paying private mortgage insurance(PMI). However, if the equity in your home is now more than that twenty percent, you should ask your loan holder if upon refinancing the PMI will be eliminated.

People also refinance to get out of an adjustable rate mortgage(ARM) and into a fixed rate mortgage. Often times one opts for an ARM when rates are low and look good, but the future of rates is uncertain. Now, that fixed rates are relatively low, it may be advantageous to switch into a fixed rate mortgage if you want to know exactly what you will need to pay each month for the life of your loan. One can also attempt to refinance the length of their loan to save money on interest payments in the long term. If a family has a 40 year mortgage,and their incomes have risen in recent years, it may be beneficial to refinance into a 30 year mortgage to pay less interest over the life of a loan.

Another very interesting way to use a home equity loan is to consolidate credit card debt and make credit card interest a tax deduction for yourself. You can potentially save yourself a lot of headaches if you use your home equity to help alleviate the pain caused by credit cards. But, you should consults a financial professional to see if this is a reality for your situation.