Equity Mortgage: Equity Mortgage - Reasons to Refinance a Mortgage and When it's Not a Good Idea

Reasons to Refinance a Mortgage and When it's Not a Good Idea
Jun 16, 2010 Debby Mayne

Refinancing is a useful means of adjusting a family's budget and getting equity out of a home. However, before making the decision to follow through on a home mortgage refinance, consider the purpose and how much the overall difference in payments will be during the life of the loan. Factor in the number of years of the loan and all closing costs. Although interest rates may be lower than the original mortgage, there are times when refinancing isn't cost effective.

Lower the Interest Rate

One of the best reasons people choose to refinance their mortgage is to take advantage of lower interest rates. The general rule of thumb is that it makes sense if the interest rate will drop by two percent. However, if the bank offers a mortgage without any closing costs, even a one percent drop may make sense.

Consider adjustable rate loans if a move before the starting rate ends is imminent. Calculate the risks of the interest rate going up by factoring in how long the family will be in the house, the cap on each adjustment of the rate and the overall cap of the interest rate over the life of the mortgage.

Lowering the interest rate may enable a homeowner to pay off a mortgage sooner, as long as there is no prepayment penalty. If the existing mortgage still has more than half the term left, calculate the difference between sending additional money toward the equity and keeping the current mortgage.

Mortgage Rate Stabilization

People who have adjustable rate mortgages may find themselves faced with payments rising each time the rate adjusts. If this is the case, refinancing to get a fixed rate makes sense. It prevents spikes in monthly payments, making easier to control the budget.

Manage Debt and Cashing Out

Refinancing might make sense for those who need to lower debt or need cash for a legitimate reason. The interest on home mortgages is generally much lower than credit card rates. After paying off credit card debt, the borrower needs to resist spending money and racking up more charges on the credit card. Some people may choose to get cash out of their home equity for college or other long-term need that will pay them back in the long run.

Home Improvement

The costs of moving can be quite high, so it might be wise to consider improving the existing home or adding on if more space is needed. Taking some of the home equity may ultimately be cheaper than moving, and the value of the home may see a significant increase.

Divorce or Separation

During a marriage separation or divorce, one of the former partners may want to buy the other one out. It may be necessary to take out a new mortgage in that person's name only to remove all liability from the person who will be moving out. In certain economic times, it takes quite a while for a house to sell, so this makes sense if one of the ex-partners doesn't mind staying in the home.

When Not to Refinance

Refinancing won't fix all money issues, so before making that decision, evaluate reasons and do the math. People who won't be in the house long enough to see the savings shouldn't refinance. There are also some financial issues that make it a bad idea.

Reasons not to refinance:

If the mortgage is old enough for the total payments of a new mortgage to be higher than what is left on the current loan.
If there is very little equity left on the home.
If the homeowner is paying off debt as a result of a spending problem.

Find this article helpful? If so, read Types of Mortgage Loans and Get the Facts Before Choosing a Home Mortgage.

References:

"Best Reasons to Refinance Your Mortgage" by Greg Mischio. Retrieved from MortgageLoan.com on June 16, 2010.

"4 Reasons Not to Refinance" by Liz Pulliam Weston. Retrieved from MSN.com on June 16, 2010.

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Tuesday, July 20, 2010

Equity Mortgage - Reasons to Refinance a Mortgage and When it's Not a Good Idea