- Refinancing can help you avoid foreclosure in some cases.House For Sale image by TMLP from Fotolia.com
There are several reasons for refinancing a home. No matter which reason you use, the end result is to improve the household financial situation by reducing costs or modifying how your payments are applied to outstanding debt. Refinancing does not have negative implications for your credit, and may even serve as an indicator that you are making the correct financial choices to reduce the risk of loss and financial liability.
Reduce Mortgage Term or Cost
- One of the main reasons for refinancing is to make the mortgage more manageable. Refinancing a 30-year mortgage into a 15-year mortgage is one method, and can save you thousands of dollars on interest rate charges alone. The equity you have accrued can be used as a tool when refinancing to help you reduce the overall cost of the home. This tactic is especially useful in avoiding home foreclosures by restructuring the amount of the mortgage.
Change Mortgage Type
- Adjustable rate mortgages are commonly refinanced to fixed rate mortgages. If you refinance before the rates adjust, you can avoid huge balloon payments and mortgage rates that skyrocket overnight. Many savvy buyers will purchase a home using the artificially low rates of an ARM, and then refinance to a fixed rate mortgage when market rates drop to more manageable levels. To discourage this tactic, many ARMs have early payout penalties that could be as much as 5 percent of the value of the home. Check that you have exceeded the early payout term, or refinancing could cost you more than it saves.
Beneficial Interest Rates
- Refinancing a home that was purchased when the interest rate was high is a simple way to knock a significant portion of the total cost off your mortgage. The way a mortgage works, you spend the first few years paying down interest rather than the principal cost of the home. When you refinance, the home is essentially paid off with a new loan, and that means that the money you have already paid in is credited toward the cost of the home, reducing the total amount financed on the new mortgage.
Debt Consolidation and Elimination
- Debt consolidation is when a person or family pools all of their debt and arranges a payment plan to deal with that lump sum. One method of doing that is to refinance the home with the additional debt calculated into the new loan amount. If this can be done when interest rates are low, it can save thousands of dollars of finance charges and completely eliminate outrageous monthly interest charged by credit card companies.