4 Benefits of refinancing from Andrew Latham, From Demand Media
1. Lower Monthly Mortgage Payments
A mortgage refinance can reduce your monthly payments. For instance, a refinance could extend the term of the loan from 15 years to 30 years, which would reduce monthly payments. For example, the monthly payments on a $200,000 mortgage with a 7 percent interest rate would drop from about $1,792 to $1,329 by changing from a 15-year loan to a 30-year loan.
2. Lower Interest Payments
If interest rates have dropped since you bought your mortgage, you may be able to refinance it to a lower interest rate. This can save you a lot of money. For example, if you reduce the interest rate of a 30-year $200,000 mortgage by just 1 percent--for instance, from 6 percent to 5 percent--you can save over $45,000 in interest payments.
3. Cash Out
A cash-out refinance allows you to tap into your property's equity by taking out another mortgage for more than you currently owe. To apply for a cash-out refinance, you must have positive equity; in other words, the market value of your home must be higher than the balance on your current mortgage.
4. Fixed Interest Rate
A refinance can change your current variable-interest or interest-only mortgage to a fixed-interest mortgage. Fixed interest rates give you the peace of mind of knowing what your monthly payments will be for the life of the loan. If you have an interest-only loan and refinance it to a fixed-interest mortgage, you might not see your monthly payments go down, but you will save money on interest payments.
Understand the fees associated with refinancing, the most common fees for refinancing are credit report fee, appraisal, and title insurance. Make sure you receive a "good faith estimate" It's a form that lenders are required to provide that details the projected costs associated with the loan. For the refinancing costs to be worthwhile, try to shave at least 2 percentage points.
To qualify for the best rate on a mortgage refinancing, borrowers must have proof of income and have equity in their home. About 20 percent equity is ideal, though some lenders will require as much as 30 percent for jumbo loans, said Greg McBride, chief financial analyst at Bankrate.com.
