The Top Three Reasons To Refinance Your Home Loan

Marcus Masters
The majority of families living in the modern world devote a significant portion of their monthly income to paying a mortgage.

It is possible to save money through refinancing your mortgage, sometimes over 5-figures a year (depending on the size of the mortgage), and below you will find the top three reasons why an individual or family chooses to refinance their home mortgage.

Before I get into the three reasons, let me first say that usually the primary motivation for refinancing a home mortgage is to secure a lower interest rate. The three reasons that I want to discuss go beyond simply trying to lower the interest rate, since it kind of goes without saying that everybody wants a lower interest rate.

The first reason that people choose to refinance is to reduce or eliminate the risk of an increasing interest rate by switching from an adjustable rate mortgage to a fixed rate mortgage.

Most people sign up for an adjustable rate when they are first getting their home loan because of the tempting lower introductory rate. What they fail to take into account at this time is that a few years down the road, their rate will have adjusted to a point where it is as high as 1-2% above the normal fixed rate.

When interest rates adjust, more times then not they adjust up and not down. This can be risky, especially if the adjustment period is short, and a good way to offset or eliminate this risk is refinance to a new mortgage with a fixed interest rate.

The second reason people tend to refinance their mortgage is to get a lump-sum of cash left over. They will work with a bank or a lender to pay off their existing mortgage, then take out a new mortgage that is greater than the value to be repaid on their home. That way they are left with a certain amount of money left over, whether it is $5,000 or $100,000. The term for this is 'cash-out refinancing.'

Cash-out refinancing can be a good idea for funding something like a large home improvement or a new car. A poential downside is that it will usually be difficult to get the same low interest rate with cash-out refinancing as you would have gotten by simply refinancing the home and nothing more.

The third reason that most people will refinance their mortgage is to switch from a subprime loan to a prime loan. The entire premise behind the subprime lending market is to provide an option for the majority of potential borrowers who do not fit the stringent qualifications for the prime loan market.

A person who agrees to a subprime mortgage usually does so without regard to the high interest rate they will have to pay, and are only concerned with getting the money for their house as soon as possible.

By switching from a subprime mortgage to a prime mortgage, you will usually be able to save 1-4% on your interest rate, and the lender will be more willing to come to agreeable repayment terms because you will be so well-qualified.
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