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Marios Lazarou

Is it the Right Time to Refinance?

Monday, November 21, 2011 - Article by: Marios Lazarou - Lyons Mortgage Services, Inc. - Message

When you bought your home, you probably assumed that the loan payments you agreed to make under the terms of your mortgage would continue for the duration of the loan. Even though most mortgage loans are originated for a term of 10 to 30 years, few borrowers keep the loan for that long.

Homeowners choose to refinance their loans for a variety of reasons. When you refinance your mortgage, you pay off your existing loan and take out a new one.

Reasons to Refinance:

1. To get a lower interest rate mortgage
One of the main reasons people refinance is to take advantage of lower interest rates. You can reduce your monthly payments when you refinance a higher rate loan for one with a lower rate. Even if the interest rate is lower, you need to consider the length of time you intend to stay in the home you would like to refinance. If you intend to stay in the home for many more years, then the upfront costs incurred in refinancing might be worth the lower monthly payments. A rule of thumb is that the new interest rate must be at least 1 percentage point lower than your current rate for the new loan to result in significant savings. However, make sure you factor in how many years longer you will be staying in the house or how many years away from repaying your current mortgage you are, and whether the upfront costs will justify the refinance.

2. To build equity faster...speeding up the growth
Refinancing a long-term mortgage with a short term mortgage will allow you to build your home equity faster. Each month, a certain part of your payment goes to the interest expense on your loan, with the remainder being applied against the principal or loan balance. With shorter term loans, a greater percentage of your monthly payment goes to the principal, reducing the amount of interest you will pay over the life of the loan and speed up the growth of equity in your home. However, remember that the shorter the term of your loan, the higher the monthly payment you will have to commit to.

3. To get a loan that recognizes your creditworthiness
If you had a history of credit problems when you took out your current mortgage, you may find that you can now refinance into a new mortgage that recognizes your improved credit by offering you a more competitive interest rate. People with a history of credit problems often have to pay higher mortgage interest rates. However, credit records change over time. So if your credit has improved since taking out your current mortgage, talk to a Lyons Mortgage Specialist about refinancing into a loan that recognizes your current improved credit status. You might also want to first call a credit bureau to get a copy of your credit report and make sure everything is reported correctly.

4. To draw on the equity already built in your home
This is referred to as a 'cash-out' refinance, and it can help you tap a portion of the equity that has accumulated in your home and receive cash at your loan closing.

5. To switch from an adjustable-rate loan to a fixed-rate loan
During times when interest rates are higher, homeowners often choose adjustable-rate mortgages (ARMs), which traditionally have lower interest rates during their early years than fixed-rate loans. When rates drop, you may want to refinance for a fixed-rate loan, which provides the stability and predictability of knowing exactly what your mortgage payment will be for the life of the loan.

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