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Should You Consider Refinancing Your Home?

Date: 
Author: 
Scott Gundermann
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Does it make sense for you to refinance your home? Depending on your financial goals, the length of time you are planning on staying in your current home and your family's cash flow situation, it could be a smart move. If you're exploring your options, below are a few factors to consider.
 
Changing from Adjustable Rate Mortgage (ARM) to a Fixed-Rate Mortgage
If you currently have an ARM, your monthly mortgage payment could change as interest rates change. The monthly payment could go up or down depending on interest rates at the time of the adjustment. While this type of mortgage tends to offer appealing starter rates, the risk of interest rates and monthly payments increasing are high. If you are uncomfortable with the potential increase, refinancing to a fixed-rate loan could not only guarantee your rate but offer you some peace of mind.

When looking at refinancing, it’s helpful to run different scenarios using a Mortgage Calculator. A lower rate not only decreases the monthly payment, but also reduces the amount of interest paid through the life of the loan.

For example, compare the principal and interest payments on a 30 year fixed-rate loan of $200,000 at 5 percent and 4 percent.
Monthly Mortgage Payment @ 5% $1,073.64
Monthly Mortgage Payment @ 4% $954.83

The difference in monthly savings is $118.81 and yearly savings is $1,425.72. Total savings over the 30-year loan term is $42,772.56.
 
Adjusting the Length of your Mortgage
Increasing the term of your mortgage could allow lower monthly payments. Some homeowners who have financial difficulties find this option appealing. Others might be starting a new business or expanding their family. Keep in mind that increasing the length of the mortgage also increases the total interest paid.

Decreasing the term of the mortgage will shorten the time it takes to pay off the loan, but will likely increase your monthly payment. For example, going from a 30 year fixed to a 15 year fixed, could save tens of thousands in interest. If the increase in monthly payments is manageable, this can be a great financial decision. 
Refinancing your home mortgage is not a decision to be taken lightly. However, if you understand the basic terms and loan structures, it can help position your family finances to meet current demands as well as future opportunity and growth.
 
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