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For instance, if you have a 30-year fixed-rate mortgage on a $100,000 property, refinancing from 9% to 5.5% can cut the term to 15 years with a slight change in monthly payments to $817 from $805. Regardless of the exact figures, it is critical that you do the math to see whether refinancing to shorten the loan term makes sense for you.
Convert an adjustable-rate mortgage (ARM) to fixed-rate mortgage
Mortgage loan refinancing can enable you to convert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage—or vice versa. Remember: ARMs can start out with lower rates than fixed-rate mortgages. However, periodic adjustments may result in rate increases that are more than the rate offered through a fixed-rate mortgage. If this happens, switching to a fixed-rate mortgage will get you a lower interest rate without worrying over interest rate hikes in the future.
The opposite is true as well. You may want to convert from a fixed-rate loan to an ARM, which usually offers lower monthly payments than a fixed-term mortgage. This can be an especially good financial strategy if interest rates are decreasing, and you do not plan to remain in your home for a long time. In this case, you can reduce the interest rate on the loan and monthly payment. However, you will not have to worry about how high rates will go in the distant future.
To tap into home equity
Homeowners usually access their home equity to pay for major expenses, which commonly include their child’s tuition or home renovations. Refinancing to remodel, for instance, is often seen as adding value to the property.
Another justification for refinancing is that the interest rate on the home loan is less than the interest rate on money borrowed from other sources. Yet another reason it makes sense for many homeowners is that the interest on home loans is tax deductible.
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