Five Ways to Gain From a Mortgage Refinance

Five Ways to Gain From a Mortgage Refinance

With the lowest mortgage rates available in decades, there are many reasons to refinance. Refinancing your mortgage just to lower your monthly payment is only one of those reasons.

You could refinance to lock in a great fixed rate if you currently have an Adjustable Rate Mortgage (ARM). You could take out some of your equity to pay off higher interest loans and credit cards, car loans, etc… You could refinance just to shorten the length of your loan.

Below are some great examples of the many things you may want to refinance your mortgage for.

Five Ways to Gain From a Mortgage Refinance

Cut Rate and Term, but Not Payment

If you can handle the same monthly payment (or even a little more), consider reducing the term of the mortgage when you refinance. With rates so low, you might be able to get the same payment for a 20-year loan as your current 30-year mortgage. Shorter terms mean lower rates.

Chris Noke, a Manhattanite and a client of mine, traded in his 30-year fixed mortgage of $315,000 at 5.75% for a 20-year fixed-rate mortgage at 3.625%. His payment went from $1,838.25 to $1,847.17 (almost the same), but he eliminated eight years of interest.

Had Chris refinanced into a 30-year loan, his interest rate would have been 4%, and his payment would have shrunk to $1,503. He would have saved $300 per month, but his total interest payments over the life of the loan would have been higher.

Extract Equity

If you have big expenses in your future — tuition, medical treatment, or a family event (not a boat or a beach house) — you can borrow while rates are low. While refinancing your current loan, see what borrowing a few extra bucks would do to the payment.

Brad of Long Island, N.Y., refinanced his 30-year fixed-rate mortgage, halved the number of years, took out an extra $30,000 to cover his son’s future tuition and increased his mortgage payment by $211 a month.

Get Rid of an ARM

Change from an adjustable-rate mortgage, or ARM, to a fixed-rate loan while the rates are low, even if it means sacrificing a lower payment.

Adrianna has a condo in Manhattan with a 5/1 ARM at an awesome 2.875%. Her original mortgage amount is for $350,000, but she has paid it down to $280,000. Her monthly payment is $1,500, but the party is set to end in December 2013. Now, 20 months before the rate adjusts, she is applying for a $280,000 fixed-rate loan at 4% with the same monthly payment. By refinancing at the reduced loan amount, her monthly payment stays the same for the balance of the loan term.

Merge First and Second Mortgages

If you have two mortgages that, combined, are less than 80% of the value of your home, try a cash-out refinance to pay off the second loan. Your monthly payment will increase because you are paying more than just interest on the second mortgage, but if the prime rate goes up in a few years, you will benefit.

If the value of the home decreased and you have less than 20% equity, a cash-out refinance can be difficult to do. But you can refinance the first mortgage for 80% of the appraised value, and if you have cash left after paying off the first mortgage, you can repay part of the outstanding balance of the home equity line of credit. Then you can ask the HELOC lender to reduce your credit limit. A good loan officer can walk you through this tricky process.

Splitting a Jumbo Loan

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