Owning a house is often the biggest dream a family can have. And because a significant sum of money is needed to make this dream a reality, saving money from monthly paychecks isn’t going to be enough — people will need to turn to home loans and other vehicles that would help them access a comfortable financing option.
A homeowner with a mortgage may want to refinance it in order to stay on top of his financial responsibilities. While this is possible, it’s important to keep in mind that there must be an excellent reason for refinancing — one that will prove the move to be truly beneficial and would keep the homeowner away from more debt than he already has.
Here are three reasons why a homeowner may want to consider refinancing his mortgage
1. To secure a lower interest rate
Essentially, refinancing a mortgage means a person will replace an existing loan with a new one. Most people do this in order to reduce the interest rate of their existing loan. Financial experts say today that 1% to 2% savings on the interest rate is worth refinancing for.
With a lower interest rate, you get to save money as well as increase the rate at which you can build equity in your home. It also helps to decrease the amount of your monthly payments.
2. To make the switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM), or vice versa
Traditionally, ARMs come with lower interest rates compared to FRMs. However, the periodic adjustments that ARMs go through translate to increases in the interest rate that are higher than those available through FRMs. To avoid being subjected to future interest rate hikes, people opt to convert to FRMs.
Homeowners can also save money by doing the opposite when interest rates are falling. Converting to an ARM in such an environment will mean that interest rates will steadily decrease and monthly mortgage payments will become smaller. This can help them avoid refinancing each time that the interest rates fall. If you have no plans of staying in your home for more than a few years, this can be a sound financial move — interest rates and monthly payments are reduced, and there will be little concerns over rising interest rates in the years to come.
3. To shorten the length of a home loan’s term
Homeowners can wait for a time when interest rates are demonstrating a significant drop. This is a good opportunity to refinance your existing loan for another one that spans a shorter term (but has similar monthly payments).
With sufficient planning, a careful calculation of the money you stand to save, and a realistic assessment of the number of years you plan to continue living in the house, refinancing can be a helpful strategy for getting debt under control and staying on top of your mortgage payments or equity. It’s best to have seasoned home loan professionals on board to help steer you in the right direction toward a financial strategy that benefits your specific situation.
