Options of Home Loan Refinancing

If you are looking to save money on your mortgage, then refinancing is probably an option that you have considered. Before you take the plunge, you need to research your options to choose the right one for your needs.

You will notice that you have two major options when it comes to restructuring your loan. The first is the cash-out choice. The second is the rate-and-term option. Of course, there are other reasons to refinance the terms of your mortgage. You could want to get out of an adjustable-rate agreement or eliminate FHA insurance.

Cash-Out Refinancing

This type of funding occurs when you take out a note for more than you owe on the home. While it might not lower your overall monthly payment, it will allow you to pay off other debt. Before you take one of these loans, you should weigh the pros and cons.

Of course, you would be paying off a bill that you would not normally have in addition to the monthly home payment. In essence, though, you are paying that bill as part of your new mortgage note. For something like a high-interest credit card, this means you reduce the overall interest rate. However, you may end up paying more than you would have by simply paying it off using the traditional method.

You also have the risk of turning unsecured debt into secured debt. As with the credit card example, should you have simply missed a payment or two on your card, you would get a lower credit score and some harassing phone calls. However, if you do the same with a mortgage, you could lose your home.

While there are some risks to this method, if you can lower your overall bills and maintain your monthly home payment within a range you can comfortably pay, it could be in your best interest to do so.

Rate-and-Term Refinancing

This is by far the most common type of option used to change loan terms. This option is employed when you take the remaining amount you owe and negotiate new terms for a lower interest rate and the time it will take to repay the note.

When considering a rate-and-term option, you should take into account if it will actually save you money, not just on your monthly payments, but also on the overall repayment amount.

For example, if you currently are paying $975 per month on a loan that still has 20 years left to pay, when you are finished, you will have paid $232,320 for the remaining term. You can refinance for a lower interest rate and pay $668 a month for a term of 30 years. However, you will wind up paying $240,480 by the time your loan ends. But if you are able to pay $868 over 20 years, you will only pay $208,320 in the end.

Refinancing is a great way to save money on your monthly bills and lower your interest rate. You need to look at the overall picture before signing any documents. While it is not something to take lightly, it is something that should be considered heavily.

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