Three reasons to refinance a home include lowering the cost of housing, shortening the term of the mortgage to pay it off sooner, or using the equity to accomplish another purpose.
Replacing the mortgage at a lower interest rate, which is entirely possible in today's market, would reduce the payment. On the other hand, shortening the term of the mortgage can make the payments increase, but it allows the home to be paid for sooner. In either case, the equity would not be reduced unless the refinancing costs were rolled into the new mortgage.
Refinancing the home to take money out increases the mortgage and lowers an owner's equity; s0 careful consideration should be made before doing so.
Mortgage rates are much lower than credit card rates and usually lower than short term borrowings like student loans or car loans. For that reason, homeowners will sometimes refinance to pay off higher-cost debt.
Some people refinance for more than their current balance to improve their cash position. Another common reason is for investment purposes, such as acquiring a rental property. At the same time, others may use it to make capital improvements on their home like remodeling or adding a pool. Another legitimate reason to refinance is to combine a first and second lien on the home, which might result in lower payments and savings in interest.
Another situation that causes a person to refinance is to remove a former spouse or co-borrower from the existing mortgage. In the case of a divorce, one of the former spouses may have no financial interest in the home any longer, but because they signed the note originally, they are still liable. This could be an untenable position.
Overall, there are a lot of potential reasons that a homeowner might want to refinance the home. The equity is a valuable asset with powerful borrowing power combined with the good credit and income of the homeowner. A refinancing analysis can help determine the new payments and how long it will recapture the refinancing cost.
Please gives us a call if you’d like to discuss the pros and cons of refinancing for your home.