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Refinancing your mortgage
Whenever rates are low, many borrowers will find that refinancing to lower interest rates makes financial sense. When you refinance, you are getting a new mortgage by first paying off the old one and then replacing it with a new one with a lower interest rate. This move can lower your monthly payment and the overall interest bill. You may also change the term of the loan to a shorter one thus paying off the loan earlier and saving on interest. By changing the term of the loan from, say 30-years to 15-years, you can build up equity more quickly on your home and cut the interest paid on the loan substantially.
You may also refinance to get additional cash you need. You can do this by going through what is known as cash out refinancing. Consumers get the difference between the loan balance and the new one at closing to spend as they see fit. Rather than to get a separate equity loan, some borrowers choose to just refinance their first mortgage and take the cash out at closing to spend. Yet refinancing mortgage may not be suitable for everyone. If you are 20 years into a 30-year mortgage, it may not make sense to refinance to a new 30-year mortgage. This would mean you would be paying off the home for a total of 50 years. A consumer with poor credit history may not qualify for good rates so refinancing could actually increase your monthly payments.
It is important to remember that when you refinance, the lender may charge a loan origination fee, which may be 1% of the loan amount. Also, any points paid in refinancing cannot be deducted from taxes in the year of refinancing as the amount is amortized over the life of the loan.
All in all, when you have built up some equity in your home, you do have options and can cash in on this money whether you refinance or obtain a home equity loan.
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