Does Refinancing a Mortgage Increase the Amount?
For many, refinancing a mortgage is a smart financial move. If you refinance, you replace your loan obligation with a different one with different terms. You might refinance for a lower interest rate, a different loan instrument or a different length of repayment. Borrowers generally choose this option to reduce the amount of their monthly payments. It may or may not increase the total amount of the loan.
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Better Interest Rate
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Some people refinance to get a better interest rate on their mortgage. According to Quicken Loans, there's a difference of more than $22,500 between a 30-year loan for $100,000 with a 5-percent interest rate and a 30-year loan for $100,000 with a 6-percent interest rate. Over 360 months, this means a savings of more than $62 a month. However, by refinancing, the term of the loan starts all over, so you'll start at month one of a 360-month term.
Debt Consolidation
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Some people like to consolidate their debt and borrow against the equity in their home to pay off other loans. If you have $50,000 equity in your home, you might borrow more than you currently owe so that you can pay off other debt at a more reasonable rate. Car loans or other obligations may be rolled into your mortgage. In effect, you can eliminate other debts, thus reducing monthly bills, but you will have combined them into a loan with a much longer term.
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Lower Monthly Payment
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Most people refinance to lower the amount of their monthly payments. By reducing your mortgage payment by a single percentage point, you can save money on your monthly debt. Depending on the closing costs, the total amount financed and the interest rate, you may realize significant monthly savings. While your monthly cost may be lower, you may end up paying more over the life of the loan. For example, if you had 22 years remaining on your mortgage, and you refinance into a 30-year loan, your payment will be based on 360 payments.
Reduce Risk
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If you currently have a loan with a variable rate, you may want the security of a fixed rate that will not fluctuate throughout the life of your loan. Particularly in unstable economic times, consumers look to the reliability of fixed rates to budget their monthly payments. Variable rates sometimes start out lower than fixed rates but, in later years, they may exceed that of fixed rates. Therefore, over time, fixed rates may cost less.
Eliminate Private Mortgage Insurance
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As you build equity in your home, you may choose to refinance to do away with private mortgage insurance, or PMI. This is an additional cost to those who have less than 20 percent of equity in their homes. Once you have more than 20 percent of equity, you may refinance to eliminate this additional cost. For some, this can result in savings in excess of $100 a month. By amortizing costs associated with refinancing your loan, you can determine how long it will take to break even, or realize savings.
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