How to Know if You Need to Refinance Your Mortgage

To refinance or not to refinance? That is the question. There are many reasons people decide to refinance their mortgages. How do you know if you need to refinance? Here are a few reasons for you to consider.

Instructions

1. Lower your interest rate. You bought your house sometime back and the rate was higher because of the market conditions. You were in a different financial situation or your credit scores were not as good. Refinancing will get you a better rate and reduce your monthly mortgage payment.

2. Cashing out. You have owned your house for many years and are sitting on a large home equity. Home equity is the monetary value of a property beyond any amounts owed on it in mortgages, claims and liens. You want to get some of that equity out so you can use it for home improvement, paying off higher credit debt with higher interest rates, buying a new car, starting a new business or just traveling around the world. Some people get an equity line of credit instead.

3. Combining multiple mortgages. You bought your house with a less than 20 percent down payment and have a first and second. Lot of times, the second mortgage carries a higher rate. As time goes by, your house value goes up and the amount you owe is less than 80 percent of the house value. By combining the two mortgages, your monthly payment is lower.

4. Change of amortization terms. You want to change the term of your mortgage from a 15-year fixed to 30-year fixed or vice versa. You may have a short-term adjustable mortgage like a three-, five-, seven- or 10-year adjustable. You may have an interest-only mortgage. When the time is right, you want to refinance to a fixed and fully amortized mortgage.

5. Jumbo to conforming. You bought your house with a jumbo loan and got a much higher interest rate. A few years later, the conforming loan -- government sponsored -- limit changes to a higher amount or you have paid a lot into your principal. Your loan amount now falls below the limit. You can refinance to get a better rate.

References

• "Bankrate.com"; When to Refinance Your Mortgage; Don Taylor; January 2009