Mortgage refinancing is a program that allows existing borrowers to pay off their current home loan debts, they do so through obtaining a new mortgage.

There are several reasons why home owners take advantage of this, such as getting a better interest rate or reducing the amount of time they need to pay off their debts. Some also refinance in order to reap the benefits of either a fixed-rate mortgage or an adjustable-rate mortgage.

Reducing the Interest Rate

One of the primary reasons people refinance is to reduce their existing loan’s interest rate. In the past, refinancing was a good idea if doing so can lower the rate by 2% at the very least. In today’s time and age though, lenders and financial experts claim that 1% is a good enough incentive.

Reducing mortgage rates not only helps borrowers trim their loan-related expenditures, it also speeds up a house’s equity accumulation. In addition, it can make monthly payments lower.

Shortening the Amount of Time for Repaying the Debt

Homeowners also choose to refinance when a drop in interest rates occur. This is because they can replace their current mortgage with a new one that doesn’t just have a shorter term but also just slightly alters monthly payments.

Switching from Fixed-Rate to Adjustable-Rate or Vice Versa

Many consumers in the United States take advantage of a refinancing opportunity so they can switch from a fixed-rate mortgage to an adjustable-rate one. This is a good idea when interest rates drop and are forecasted to continue a downward trend. By making the switch, borrowers can enjoy the lower initial interest rate and monthly payments.

Conversely, home owners can also swap their ARM to a fixed-rate one. In many cases, they do this because their mortgage has reached the point wherein the rate can already move in an upward trend. Because this particular type of loan comes with the great risk of shockingly high monthly payments, swapping it for one that has a locked-in rate makes for a sound financial decision.

The Verdict

Borrowers should consider refinancing if it can help reduce their monthly mortgage payments or if they want to get out of their debt sooner. As long as used properly, it can also help home owners manage their financial responsibilities better. It’s important to carefully assess one’s financial situation first, as a wrong move can lead to an even bigger debt that may ultimately result in foreclosure or even bankruptcy.

References:

Federal Reserve Board: https://publications.usa.gov/USAPubs.php?PubID=3125

S. News and World Report: http://money.usnews.com/money/personal-finance/articles/2015/06/04/a-complete-guide-to-refinancing-your-home-mortgage

Zillow: https://www.zillow.com/mortgage-learning/how-to-refinance/