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Refinancing To Lower Mortgage Payments

What does it mean to refinance?

To start, refinancing is when you receive a secure loan to replace an existing loan that is secured by the same assets. In other words, you take out a new mortgage to replace the existing mortgage loan you already have on the same asset (your house).

What are some reasons people refinance?
People refinance for different reasons. Some homeowners refinance to tap into the equity they've accumulated in their houses, using the funds or equity for other purposes. This type of refinancing is usually called "cash out" refinancing. In other words, you get the difference between the value of your original mortgage and the amount currently owed.  Another type of refinancing is done when you want to change your repayment term and/or interest rate ("rate and term" refinancing). For example, if you have an ARM (Adjustable Rate Mortgage), your payments can eventually fluctuate with the prime rates or current market interest rates charged by banks to their customers after a few years. As rates go up, so do your payments. Therefore, obtaining a fixed rate can be beneficial in stabilizing your payments by keeping your payments from increasing.

So how can refinancing lower my payments?

The main ways people are able to lower their payments is by lengthening their repayment term or refinancing at a lower interest rate (if current interest rates fall lower then your current interest rate or your credit improves from when you first obtained a mortgage). For example, if you have a 15 year mortgage and you extend it to a 30 year mortgage, then you are paying your mortgage over a longer time period so your payments will be less per month. If interest rates fall or your credit improves, then refinancing to a lower interest rate will also lower your monthly payments because you will be paying less in interest per month. However, realize that refinancing does come with costs that need to be factored into your decision to refinance.  Costs range from the cost of the appraisal, title search, and closing costs which can significantly add to the cost of your loan. Therefore, when speaking with any mortgage professional, make sure you understand what the total upfront costs will be when refinancing.

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