In recent times, the incidence of mortgage refinancing has gone on a rise. It is referred to as replacement of the original mortgage loan with a new one with different terms and conditions. The terms and conditions of a refinance mortgage depend upon several factors such as risks involved in it, credit worthiness of the borrower and the existing legislations. In majority of the cases, you opt for refinance mortgage when you are under financial stress. Sometimes, it is also referred to as debt restructuring.
There could a variety of reasons, why you, the homeowner, opt for mortgage refinancing. It ranges from reducing the rate of interest, shorten or lengthen the term of the loan, shifting from an adjustable rate mortgage (ARM) to a fixed rate mortgage (FRM) and vice versa. Aside from these, you sometimes opt for mortgage refinancing so as to tap your home equity to make some big purchases and for consolidating debts that you owe. Here discuss about the various reasons to take out a refinance mortgage.
To reduce the rate of interest
One of the main reasons to opt for mortgage refinancing is that it reduces the rate of interest. In other words, your monthly repayment amount gets reduced so that the mortgage loans become more affordable to you. As a thumb rule, it is said that if the rate of interest can be lowered down by at least 2%, it makes good sense to opt for mortgage refinancing. Lower rate of interest does not only help you save money, but it also helps you build equity in your home.
To change the term of the mortgage loan
If you want to pay off the mortgage loan in a shorter span of time, you can do that through mortgage refinancing. Again, if you face difficulty in making the monthly mortgage payment, you can reduce your monthly payment amount by increasing the term of the loan. This somewhat eases the pressure of making a very steep monthly mortgage payment.
Shifting from ARM to FRM and vice versa
While the initial rate of interest associated with ARM is less than the rate of interest associated with FRM, but subsequently the rate of interest associated with ARM may rise with every rise in the market rate of interest. In this situation, if you are into ARM, it makes sense for you to switch to the stability of a FRM. On the other hand, if you are into a FRM, and find that the market rate of interest as well as the rate associated with ARM is substantially lower than the rate of interest associated with FRM, you may opt for switching to ARM. However, this is possible only through refinance mortgage.
Apart from the above mentioned reasons, you can take out a mortgage refinance for few other reasons too. If you use mortgage refinancing carefully, it can also serve as an excellent tool to contain your debt. Again, with low monthly repayment, you can build up equity in your home much quickly.