Refinancing
If you’re planning to stay in your home a while, there are many good
reasons to consider refinancing. These include:
- getting a lower interest rate;
- cashing out some of the equity in your home; and
- changing the loan term.
Through the 1990s and early 2000s, many American homeowners refinanced their
properties—sometimes more than once—as interest rates dropped
to record lows. Doing so, they were able to lower their monthly payment—often
dramatically.
Because real estate prices also had climbed dramatically in many areas,
some of these homeowners also took the opportunity to “cash out”
some of their home equity. In other words, when they refinanced, they got
a new loan for a higher amount than they owed on the old loan. They received
the difference in cash. In many cases, they used this cash to pay off credit
cards and other forms of non-secured consumer debt that carried high interest
rates.
Still other homeowners found that they were in better financial shape than
they had been when they got their initial loan. So, they chose to refi from
a 30-year loan to a 15-year loan. This way, they reap the benefits of an even
lower interest rate and they accumulate equity in their home faster.
A refi can be good for people whose credit scores have improved during
the time that they’ve owned their home. (And this happens fairly often,
when people settle down from less responsible young-adult years.) If you
paid high closing costs to get a high interest-rate mortgage when you bought
your house, keep an eye on your credit score. If it’s risen 50 points
or more, you may be able to get a better loan on better terms.
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