- Refinancing a home may be a good financial decision under the right circumstances.roosevelts home image by Photoeyes from Fotolia.com
Refinancing your home involves taking out a new loan to pay off an older loan on the same property. Whether refinancing your home is an appropriate financial decision depends on numerous factors, including how long you have lived in the home, how much equity has built up in the property, what costs are associated with the refinance and what you wish to do with any funds borrowed in excess of the value of the home. - One of the most common reasons homeowners choose to refinance their existing home mortgage is to obtain a lower interest rate. According to BankRate, the prevailing mortgage interest rate as of January 2010 was almost 6 percent. The average interest rate on a 30-year fixed rate mortgage as of September 2010 was 4.25 percent. Refinancing from 6 percent to 4.25 percent would result in a monthly mortgage payment savings of more than $100 per $100,000 financed.
- Mortgage interest rates are usually among the lowest rates available to consumers. The average interest rate charged on general market consumer credit cards as of August 2010 was nearly 17 percent--significantly higher than the 4.25-percent average mortgage interest rate. Homeowners who have sufficient equity in their homes may choose to refinance their home and use the excess to pay off their high interest rate credit cards, consumer loans or second mortgages and consolidate them into one monthly payment with a lower interest rate.
- Homeowners who purchased a home with an adjustable rate mortgage (ARM) may wish to refinance their existing mortgage into a traditional fixed rate mortgage. The interest rate on an ARM is typically tied to a financial indicator such as the prime rate. These types of mortgages usually have a floor below which the interest rate cannot drop, but if prevailing interest rates rise, the rate on the mortgage rises as well, making it difficult to plan. By refinancing into a traditional fixed rate mortgage, homeowners can lock in a favorable interest rate that will remain stable for the life of the mortgage.
