Refinancing is the process of obtaining a new mortgage in an effort to reduce monthly payments, lower your interest rates, take cash out of your home for large purchases, or change mortgage companies. Most people refinance when they have equity on their home, which is the difference between the amount owed to the mortgage company and the value of the home. Five common reasons people refinance their homes are:
- You can reduce the interest rate (and, therefore, interest costs) by financing at a lower rate. This is a primary reason for refinancing. Depending on the circumstances, you can save a lot of money!
- You can extend the repayment time; thus, reducing the monthly mortgage payment. This increases your cash flow. That money can then be used to pay off high-interest debt (e.g., credit cards, school loans).
- Reduce your payment by changing from a variable-rate to a fixed-rate loan. This frees you from the sometimes expensive interest rate/payment fluctuations that can occur in a volatile real estate market.
- Rather than extending the term, you may decide to shorten the term and reduce the interest rate – for example, moving to a 15-year fixed rate. This may not increase your payment much and will still allow you to pay off your house years sooner.
- Finally, if you are a homeowner who understands investing money, you can refinance in order to raise cash for investments, improve overall cash flow, etc.