What does it mean to refinance a mortgage?

To refinance a mortgage means you take out a new home loan and use it to pay off the one you have now. You keep your home. The new loan has its own rate, monthly payment and length, and you make your payments on it instead of the old loan. A refinance has closing costs (the fees paid to close a loan), much like the loan you used to buy the home, so it only makes sense when what you gain is worth more than those costs.

People refinance for different reasons. Some want a lower rate or a lower monthly payment. Some want to take cash out of their equity (the part of the home you own outright: its value minus what you still owe). Others want to change the length of the loan or take a name off it. A lower payment is never a sure thing. It depends on your credit, your home's value and the rates offered when you apply. Here are eight common reasons homeowners refinance.

Reason To Refinance: Cash Money

A cash-out refinance lets you turn part of your equity into cash. The new loan is bigger than what you owe now, and you get the difference in cash. For example, say your home is worth $500,000 and you still owe $300,000. Lenders limit the new loan to a share of the home's value. For many conventional and FHA cash-out loans on the home you live in, that limit is 80%, which here is $400,000. You could refinance to $350,000. That pays off the $300,000 you owe, and the $50,000 left over, minus closing costs, is paid to you in cash. VA loans may allow a higher amount for eligible borrowers, depending on the lender. Your new balance is bigger than the old one, so your monthly payment may go up even if your rate goes down. This example is for illustration only. It is not an offer or a commitment to lend. Limits and costs vary by lender and loan program.

Valley West Mortgage is not affiliated with or endorsed by the VA, FHA, HUD or any government agency.

Reason To Refinance: Lower Interest Rates

If you bought your house at a time when interest rates were high, a refinance could give you the chance to get a lower mortgage rate. This kind of refinance (in most but not all cases) will make your monthly payments lower, meaning you could pocket the money you would have been spending on your mortgage payment.

Reason To Refinance: Save For Something Special

If your daughter’s Sweet 16 is coming up or you want to take family vacation next year, you could refinance for lower mortgage payments, save the extra money and put it towards something you really want.

Reason To Refinance: Change In Household

If you have a spouse who has passed away or maybe an ex-spouse who no longer lives with you, you could refinance the loan into just your name. Or maybe your parents bought you your first home and now that you’ve got a family of your own you want to refinance the payments into your name instead of your parents’ names.

Reason To Refinance: Get Out Of An Adjustable Rate Mortgage (ARM)

An Adjustable Rate Mortgage is a type of loan that allows for your interest rate to go up or down. When rates are low an ARM could be phenomenal for your finances, but when rates rise and Arm can be financially draining. A refinance will give you the opportunity to change your mortgage to a fixed rate mortgage, meaning your payments will not fluctuate with rates.

Reason To Refinance: Change Your Bank

If you originally took out your mortgage loan will a small state bank or credit union and you are moving to a state where this bank doesn’t do business, you could refinance your home loan with a new bank that is closer to you.

Reason To Refinance: Shorten The Life Of Your Loan

Although refinancing to a higher mortgage payment won’t save you money right away, it could save you money in the long run. If you refinance and change your loan term from a 30 year fixed mortgage to a 15 year, the amount of interest you would have paid at the end of your 15 year loan will be significantly less than what you would have paid had the life of your loan been longer.

Reason To Refinance: Credit Card Debt

Thousands of Americans are spoiled by the luxury of credit cards. We can spend now and pay later. The problem occurs when we get a little too credit happy and we lose control. Drowning in credit card debt is not a way to live your life. The constant letters and phone calls from bill collectors can be agonizing. Refinancing on your home loan can provide you with a way to pay on credit card debt.

Sources:
http://www.getrichslowly.org/blog/2013/03/21/5-reasons-to-refinance-your-mortgage/
http://www.bankrate.com/finance/refinance/7-good-reasons-for-a-mortgage-refinance-1.aspx

 WHITNEY RUSH, VALLEY WEST MORTGAGE