4 Reasons for Refinancing Your Mortgage Loan

Deciding to refinance your mortgage loan depends on different reasons for different people. It really is going to depend on your situation and knowing the reasons why you want to refinance. Let's look at 3 common reasons people refinance their current mortgage.

1. If you are paying too much every month for your mortgage it may be time to refinance. A drop in interest rates could mean big savings for you. If you have made your payments on time and have a good overall credit score refinancing at a lower mortgage rate could lower your monthly payment and help you have more money at the end of the month,

2. If you have built up some equity in your home and you need to access some cash refinancing your mortgage could be just the place to get it. If property values have increased since you took out your mortgage loan you are sitting on a pile of money that could come in handy.

Banks do not really care about what you want the money for. Common reasons to pull out some cash on the equity of your home could include paying for your daughters wedding, doing a home improvement, taking a vacation, or paying for college tuition.

All the bank wants to see is that you have a way to repay the loan and they are secured by the equity in your home when they do the loan.

3. If you have an adjustable rate mortgage that has crept up and is getting ready to roll into a high fixed rate this may be another reason to refinance. People take out an ARM to get a lower rate and to be able to qualify for a little bit more expensive home.

After a number of years the ARM will be ready to settle into a fixed rate loan. Depending on the fixed rate you may be able to do better by refinancing. Your mortgage loan professional can help you decide the best route for you to go if this is the case for you.

4. One other reason that people look at refinancing is to shorten the length of the loan. That is commonly done when you want to go from a 30-year loan to a 15-year loan.

If your income has gone up and you determine you want to stay in the home you have for many years to come then this makes sense. Paying off your loan early gives you the peace of mind of knowing you own your home.

These are 4 good reasons that you may want to refinance your mortgage loan. The important thing is to know "why" you want to do it and make sure it is best for your situation.

When Does it Pay-Off to Obtain a Home Mortgage?

If you are in dire need of money and don't have the financial means for a large cash transaction to buy a house, then opting for a home mortgage is worth consideration.

Basically, a mortgage refers to a long-standing credit that a debtor obtains from a financial institution or from a property seller.

In most cases, the house is the usual collateral for the mortgage, thus the term "home mortgage". In turn, the mortgage lender will be entitled to some legal rights upon the property as long as the mortgage is in full force or until the debtor pays back the loan.

A home mortgage serves as security for loans, thus giving the lender the power to acquire the property through foreclosure in the event that the borrower fails to pay the loan on time.

Generally, a home mortgage is comprised of a large loan. That's why in most cases a home mortgage can take 15 to 30 years before the borrower can pay back the due amount.

In a home mortgage, the due amount to be paid by the borrower stipulates the principal amount of the mortgage and the interest owed relative to the outstanding balance. The real estate taxes and property insurance are also factored into the total mortgage balance.

Some home owners who find it difficult to make their mortgage payments may opt for refinancing of their mortgage. But for those who wish to pay off a home mortgage quickly, there are things to be considered...

First, make sure you have a stable source of income. Organize your overall financial assets to ensure that paying off your mortgage will not over-extend your cash flow. There are many such considerations that should be carefully planned and organized before resorting to pay-off your home mortgage.

It's also important to your financial security to have a ready reserve of cash just in case of emergencies. This can be in the form of stocks and bonds, a bank savings account, or any other readily available form of cash.Paying off your home mortgage can be a rewarding experience, but be sure to consider your overall financial status before making the decision to do so. The wrong decision can put you at great financial risk.

If you think that you are ready for the mortgage "experience" and that you have your finances securely organized, then by all means, go for it. After all, nothing beats a worry-free, mortgage-free financial status.

What’s the Deal with Interest Only Mortgages?

Have you heard that commercial about interest-only mortgages...the one where you’re told about what a wonderful benefit it is to have a low, low mortgage payment and all the wonderful tax write-offs you will receive?

Before you decide to buy now and pay later, that is pay “big time” later, take a moment to enlighten yourself a bit more about these so-called “interest only mortgages.” Think about it for a moment. If you just pay the interest on your home, will you ever start paying on principal and will you ever earn any equity into your property?

By definition, a mortgage is a temporary, conditional pledge of property to a creditor as security for performance of an obligation or repayment of a debt. Simplified, that means you borrow money from a financial institution and they essentially buy your house and you pay it back. How can this happen if you’re just paying interest? More accurately, interest-only mortgages are a temporary reprieve for paying off a traditional mortgage. You may actually be prolonging the inevitable and eventually making it even more costly to pay off your mortgage.

Far too many people are in debt way over their heads because of interest-only mortgages. They took advantage of attractive offers to buy now and pay later. With an interest only payment you’re keeping the principal at minimum value while continuing to pay interest at 100%. With a more conventional mortgage you’d be slowly dwindling down the total interest amount.

Most interest-only payment schedules are offered on Adjustable Rate Mortgages (ARMs), but they can also be found on a fixed rate mortgage. Interest-only payment periods almost never run for the entire term of the loan which is typically 15 or 30 years. Depending on the terms of your contract, you could be expected to start paying on the principal in five, seven or ten years. Once the interest-only period ends, your monthly payment will go up because then you’ll be paying on both principal and interest.

Conversely, interest-only mortgages can be a good thing for some people. For those people wanting to purchase a bigger/better home for a lower down payment AND who anticipate moving within seven years, the interest-only payment method may be the way to go. However, keep in-mind that in a "down" realestate market you generally won’t be building equity and making money by doing it this way. The majority of the money made from investing in real estate comes from an increase in value to the home. The average person moves every seven years anyway. Gone are the days when people stay in a home thirty years. Hence, if you anticipate moving before you’ll have to start paying on the principal, then an interest-only payment may be ideal for you.

There’s a great deal of fine print to any mortgage. Evaluate your own goals; be vigilant when reviewing the terms on the loan you’re considering before acting.

Repay Your Mortgage As Slowly As You Want

For years, banks and financial advisors have been recommending that you pay extra cash into your mortgage, to cut down the huge interest amount and reduce the period over which you pay back the loan. For example, if you borrow $200 000 over 30 years at a rate of 5%, your monthly repayments would be around $1074. Over 30 years, you would actually pay $1074 x 360 (months), which is $386 640. That's $186 640 in interest! If you could find an extra $246 a month, and pay $1320 a month into the mortgage, you'd cut 10 years off the repayment period - the loan would be fully paid in only 20 years. Moreover, your total payments would be $316 664, saving $69 756! The flaw in this technique is that it ignores the time value of money. Everyone knows that money is worth less now than it was when they were younger. If you take that $1074 mortgage repayment, for instance, in 30 years time, when the last payment is due, it would only be worth $437 in today's money. A dollar now is always better than a dollar in a year's time, or in 10 year's time. How does the time value of money affect our example? You cannot simply subtract the mortgage interest amount for a 20 year mortgage from the interest on a 30 year mortgage. What you need to do is calculate the Present Value of each mortgage. The Present Value of a 30 year mortgage with repayments of $1074 at a 5% interest rate is $200 066. The Present Value of a 20 year mortgage with repayments of $1320 at a 5% interest rate is $200 066. The two repayment schemes are exactly equal. The $69 756 'saving' in the interest rate is really just the effect of adding the extra $246 a month into the repayments - in fact, that $246 a month adds up to $59 040 over 20 years. What if you took that $246 a month and invested it in, for example, mutual funds? If you could get a return of 10% p.a., after 20 years you would have $186 804. With inflation at 3%, that would be worth $102 597 in today's money. Why would the banks recommend that you pay off your mortgage quickly? Surely the longer the income stream lasts, the better? The banks love being able to prove that their recommendations will 'save you money'. But in reality, the banks do understand the time value of money. They know the true value of that extra $246 a month that you're giving them now, not in the future. And the shorter the time you take to repay the mortgage, the lower their risk, and the sooner their money comes back to them to be loaned out again. There are some arguments for paying your mortgage back quickly - for one thing, the quicker you pay, the quicker your equity grows. But you should understand that every dollar you give the bank now is a dollar that you can't invest. Giving your money to the bank to avoid paying 5% interest means that you can't use that money to earn 10% or 12% or 15% somewhere else.