When and why to refinance
Are you finding it difficult to clear your mortgage payments? Consider refinancing – an alternative option to pay down your mortgage debt. Refinancing can be of two types – one involving the rate and term, known as the rate-and-term refinancing and the other, cash-out refinancing.
Rate-and-term refinancing: This allows you to repay your existing mortgage with the proceeds from a new loan, using the same property as the collateral for the loan. Either you get a better loan term, or you look out for the lowest rate, so that you can build up equity faster.
For example, if you have a short term ARM, you can refinance into a fixed rate loan. On the other hand, if you have a fixed rate loan, and you wish to relocate in 2 to 3 years, you can consider refinancing into a lower rate 3/1 year hybrid ARM.
Cash-out refinancing: It provides you with the cash beyond the amount required to pay off your current mortgage along with the closing costs, points, etc. For instance, you may have borrowed $100,000 to purchase a property worth $130,000. The property value at present is $200,000 and you owe $90,000. The cash-out refinancing helps you to pay off the $90,000 and keep aside the remaining $40,000 minus the closing costs. But it’s always better to go for refinance when the market rates are at least 2% lower than the rates on your current mortgage.
After all, you need to save and that’s why you think about varying the mortgage terms and conditions.
