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Mortgage Refinance 101

Reasons To Refinance A Mortgage

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Get cash. If your house is worth more than you owe, you can access cash by replacing your current mortgage with a larger one. For example, if your home is currently valued at $150,000 and your loan balance is $80,000, you might be able to get a new mortgage for $112,500 (75% of $150,000). That would allow you to pay off the $80,000 balance and have $32,500 to spend however you wish.

Lower your monthly payments: You can lower your monthly payments either by refinancing to:

  • A new mortgage with a lower rate of interest.
  • A new mortgage for a longer period of time.
  • An interest-only mortgage which reduces your monthly payments because you only pay interest, and not any principal - typically for the first ten to fifteen years. Monthly payments are reduced even though these mortgages typically carry a rate that is one-eighth to three-eighths of a percentage point higher than the rate on a traditional 30 year fixed-rate mortgage. You can get an interest-only mortgage with a fixed rate (the rate of interest stays the same throughout the term of the loan) or a variable rate (the rate fluctuates according to a standard, such as a consumer price index.) Payments jump substantially at the end of the interest-only period. You basically pay off the balance of the mortgage over the rest of the loan term instead of over the whole loan term. Also, during the interest only phase, your only equity build up in your home is from rising property values.

When your finances improve, you can minimize the shock of the increase by paying money against the principal during the interest-only period. As you pay down the principal, the interest-only payment is reduced to reflect the lower loan balance.

To calculate the true cost (or savings) or refinancing, try's online calculator at offsite link, or check with your financial planner.

Lower your overall costs: If interest rates are lower than when you took out your mortgage, you can replace your mortgage with a new one at a lower rate of interest. Consider costs of taking the new mortgage before leaping into a new mortgage for this reason.

You can find current interest rates by calling your local banks or on the internet at such sites as offsite link.

To find out whether it's worth refinancing because of a lower interest rate, use the refinancing calculator at offsite link.

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