Refi Your Mortgage: Save Money By Refinancing Your Home

Posted on 01 October 2011

Refi Your Mortgage: Save Money By Refinancing Your Home: Many of you that own homes are probably under water at this point. However, for those of you that have the ability to refinance homes, you’re in a perfect situation to save some interest and keep some extra money in your own pocket. Here are some various ways that you can refinance your home!

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The most popular way to refinance your home is just by getting another mortgage. The concept here is simple. As long as the bank still sees that you have at least 80 percent loan to value (meaning that you don’t owe more than 80 percent of what the home is owned), the bank will simply rework your mortgage.

Another regular way to adjust your mortgage is by paying your home off and opening up a home equity line of credit, or a HELOC. Home equity lines have gotten a lot of people in trouble in the past, but the responsible borrower can really use that to their advantage. The majority of banks will offer you two types of lines of credit.

The first is a fixed line, which basically acts like a second mortgage. This would more or less be the same thing as totally refinancing your mortgage. The second way would be to open up an interest only loan. In other words, the bank loans you a certain amount of money, and you only owe interest on that money each and every month. Usually, you will have 10 years of which you can borrow the money with only interest being due, but obviously, as you pay down the principal, the interest you owe every month will decrease as well.

And then you have ARM payments. Normally speaking, ARMs, or adjustable rate mortgages are only going to be used on homes that you plan on keeping for a short period of time (or that you know you can pay off over a short period of time). Most financial advisors don’t suggest ARMs for their clients due to the fact that an ARM will change rates when the term of the mortgage comes due. In other words, when you get a 10 year ARM, your rate adjusts itself after 10 years, and you’re subject to A) more closing costs and B) a new rate on your mortgage that could be significantly higher than where it was when you first established the mortgage.

No matter how you choose to refinance your home, you need to consider a few things.

First off, you know that you are only going to refinance to either make your payments per month cheaper, or to adjust your interest rate lower. If you owe $100,000 on your house and pay it off in 10 years at a 5% interest rate, you’ll end up paying $27,278.62 in interest over that time. If you can reduce that mortgage to 4% by refinancing, you’ll save yourself almost $6,000 in interest over that 10 years.

Sounds like a great deal, right? Sure, if you can find a fixed rate of 4%, you’re in luck. However, odds have it, you’ll end up having to deal with a variable rate on your mortgage to get a rate that low. The risk that you run with a HELOC or an ARM is that you could end up with a higher rate than where you started at as prime rises. (Your interest rate is based off of prime and will usually be somewhere around prime + 0.5% interest, though banks actually have promotions that you can get less than prime as your interest rate)

The other question is how much closing costs are to do a refinance. If you are saving $1,000 in interest and have $1,200 in closing costs, sure your payment might be slightly lower every single month, but what you have spent up front could have been put down on your mortgage instead.

One thing is for sure right now, and that’s that interest rates are literally historically low. Prime is below 4% right now, numbers which you just haven’t seen in the history of the country. If you can afford to do it, this is the time to take advantage of these and our other Mortgage Tips. Be sure to check ’em out and take advantage of these great opportunities to refinance your home and save money today!

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