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Refinancing Your Mortgage

Home Buyer David Gordon September 19, 2023

Should you refinance your mortgage and when?

Refinancing a mortgage means paying off an existing debt and replacing it with a new one.
 
When refinancing, you can consolidate debt, adjust loan terms, lower your monthly payment, or even take some cash out of the equity in your house to pay bills or make improvements.
 
 

Secure a Lower Interest Rate

Lowering the interest rate on your current loan is among the best reasons for refinancing.
 
Typically, refinancing makes sense if you can lower your interest rate by at least 2%. However, many lenders assert that 1% savings is a sufficient inducement to refinance.
 
A mortgage calculator can be a useful tool for planning some of the expenses.
 
 

Convert an ARM to a Fixed-Rate Mortgage

Borrowers typically receive a lower interest rate at the beginning of an adjustable rate mortgage (ARM).
 
However, the interest rate may change after a predetermined period (often 5, 7, or 10 years), and not necessarily in the borrower’s advantage.
 
Because of this, some homeowners choose to convert their adjustable-rate mortgage (ARM) into a fixed-rate loan, which eliminates this fluctuation in interest rate.
 

Shorten the Loan's Term

Homeowners occasionally have the option to refinance an existing loan for a new loan.
 
The refinancing happens with a much shorter term without much changing of the monthly payment, when interest rates fall.
 
 

Get Rid of PMI

Refinancing is not always necessary to remove private mortgage insurance from a traditional loan.
 
You can get rid of PMI without paying off your loan, unlike FHA MIPs. As soon as you have enough equity—typically 20%—you can ask for cancellation.
 
 

The bottom line

Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan, or helps you build equity more quickly. When used carefully, it can also be a valuable tool for bringing debt under control.

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