The decision to refinance your mortgage is an important financial decision that should not be taken lightly. Just because you can refinance your mortgage, does not make refinancing a smart financial decision. Here is what you need to know to avoid making hasty financial decisions without considering all of your options. The average homeowner in the United States refinances their mortgage every four years. There are a variety of reasons for refinancing, some good and some bad. Here are common reasons for refinancing your mortgage that make good financial sense.
Convert to a Fixed Interest Rate
One of the more common reason for mortgage refinancing these days is trading your adjustable interest rate mortgage in for a traditional, fixed interest rate mortgage. Many homeowners used these riskier adjustable rate mortgage loans to purchase homes when interest rates were lower; some purchased more home than their budgets could afford. The riskier varieties of adjustable rate mortgage include interest only and option mortgages; if you have one of these mortgages and do not have the stomach or budget for rising interest rates you may want to convert to a fixed interest rate mortgage now before your monthly payment gets out of hand.
Lower Your Interest Rate
If your financial situation has improved since you originally financed your home you could qualify for a lower interest rate or better terms on your new mortgage. Improvements to your financial situation include higher monthly income, reduced debt, or a higher credit rating. If you financed your home with a subprime, or bad credit mortgage lender, you will want to refinance this mortgage in two or three years when your financial picture improves.
Convert to a Higher Term Length
If your monthly income has increased enough to afford a higher mortgage payment, you might consider refinancing to a 15 or even 10 year mortgage. The reason for doing so is that while your monthly payment amount will be higher, you will pay less interest to the mortgage lender and build equity in your home at a much faster rate.
Cash Out Equity
There are a number of reasons for borrowing against equity in your home, some good, some bad. Cash out refinancing will not necessarily save you money; however, it could allow you to pay for repairs, renovations or other financial emergencies. A good use of equity in your home is to consolidate other high interest debt such as credit cards to help get your cash flow under control.
Regardless of your reasons for refinancing you want to be careful not to overpay for your new mortgage. There are a number of expenses involved with refinancing and if you do not do your homework and carefully research mortgage lenders it is easy to overpay for your new mortgage. To learn how to avoid common mortgage mistakes including overpaying for your new mortgage, register for a free mortgage guidebook.
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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing - What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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