Mortgage Myth Shattered: Home Loan Refinancing Can Make Sense

You’ve probably heard it all at this point, right? Whether you’re first embarking on the home loan process or whether you’ve been making timely payments for years, there’s a good chance you’ve come across an assortment of facts and figures.

Perhaps, as Quicken Loans points out, you’ve even come across the following myth:

• You should never refinance your mortgage

FALSE!

Sure, there are times when you should leave your mortgage alone, but there are also times when mortgage refinancing could reap lots of rewards. Managing your home loan wisely should be a part of how you manage your assets.

Lowering Your Monthly Payment

One of the biggest reasons many people refinance is to lower their mortgage interest rate which, subsequently, lowers their monthly payment. Let’s say you got a loan with an interest rate at 7.5 percent; your loan amount was $100,000; and it’s a traditional 30-year fixed. Your payment (without taxes and insurance) would be just under $700.

Now, let’s say rates have dropped down to 6.5 percent. If you were to refinance, your payment would drop to about $632. Now that you’ve refinanced, you’re keeping nearly $70 more in your pocket a month that you could use toward other bills or just extra spending money. Over a year, that adds up to $840.

Refinancing from a Fixed to an ARM

Not interested in lowering your rate and payment? Fine. Let’s say you have a home that you bought with a 30-year fixed-rate mortgage. But what if you have to move often?

Keeping a 30-year fixed rate mortgage doesn’t make as much sense in these types of situations as having a shorter-term adjustable rate mortgage (ARM) because the rates for a 30-year fixed are often higher which means you’re paying more. Why pay more when you don’t have to?

Refinancing from an ARM to a Fixed

Let’s say you do have an ARM. Why would you need to refinance to a fixed-rate mortgage? If mortgage rates are continually rising, as they were between 2004 and 2006, you’d want to keep your rate from increasing too high. Otherwise, you face increases in your monthly payment. In this case, you’d want to refinance to a fixed rate to avoid rising rates and payments.

Getting Cash from your Home

Whether you have a fixed or adjustable rate mortgage, there are times when it’s prudent to do a cash out refinance. You might need to make home improvements or consolidate high-interest debt. Let’s say there was a big storm that ripped through your neighborhood and now your roof is leaking. You realize you need to have the entire thing replaced.

What do you do?

Don’t reach for that credit card, if you want to fix it. Credit cards carry higher interest rates than do mortgages and, unlike mortgage interest, you can’t deduct credit card interest from your taxes. (Always check with your tax advisor.)

Or what if you went through a financially hard time and now you have thousands of dollars of debt racked up on your credit cards. How are you going to pay off those bills?

The better solution is to refinance your mortgage to get cash out of your home using your home equity. Essentially, you get a new mortgage to pay off your old mortgage and you have extra money (taken from your home equity) to pay for home repairs or improvements or to pay off your debt.