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Reasons for a Home Refinance

Everyone has their own reason for refinancing, but usually to save money or take cash out.

Reduce the Monthly Payment

Instead of looking at the difference in the refinance rate, compare the savings between your existing monthly payment and the home refinance payment. Use only the principle and interest payments on a loan amount that includes the closing costs, but does not include taxes, insurance, or cash out. Then decide if the monthly savings will make it worth your while.

 Consolidate Credit Card Balances

If you are carrying a substantial balance on credit cards, you may have a good chance of saving money with a home refinance. Consolidating high rate, compound interest debts with a low rate mortgage may reduce your total monthly payments, and convert your debt into a tax deductable, simple interest loan.

Pay for Personal Expenses

A home refinance with cash out can provide money for personal expenses. As long as you have sufficient equity in your home, refinancing could be one of the cheapest ways to access funds at a low rate. You may have medical expenses, a college bound teenager, or maybe a need for home improvements, or perhaps you would just like to take your family on nice vacation.

Change from Adjustable to Fixed Rate

Adjustable rate loans can serve their purpose, which is usually for the short term, but eventually interest rates go up, and your monthly payments inrease accordingly. If you plan to keep your home for a long period of time, refinancing to a fixed rate can provide stable, long term savings.

Reduce the Term of the Loan

A home refinance with a shorter term can reduce the amount of interest you pay over the life of the loan. There is about $120,000 difference in interest charges between a 15 year mortgage and a 30 year mortgage, on a $200,000 loan. You can build equity in your home much sooner with a shorter term, and plan ahead for retirement by setting a goal to eventually pay off your mortgage.

Eliminate Mortgage Insurance

Provided you have enough equity, a home refinance can save money by eliminating unnecessary insurance. If you paid less than 20% down payment when you bought your home, you may still be paying mortgage insurance. The insurance is only for the benefit of the lender, and is included in the monthly payment until you sell your home, or refinance at 80% loan to value, or less.

Understanding Your Credit Score

Your credit score is a predictor of how likely you are to pay back your loan — typically, the higher the score you have, the better credit terms you’ll receive. Read on for more explanation of how your score is calculated and what it means for your loan.

The credit score is determined by three independent credit bureaus — TransUnion, Equifax or Experian — which take into account the duration of your credit history, the amount of debt you’re carrying, the size of your existing loans, your payment history, the different types of credit you’ve used (e.g. installment loans, revolving loans) and outside inquiries into your credit.

Since your credit score will impact the interest rate you are offered, it’s helpful to know your score before you apply for a loan. Each of the three bureaus will provide you with one free credit report per year, so use this opportunity to stay up to date on your credit status.

Although building your credit score generally takes time and persistence, here are a few tips to keep in mind:

  • Always pay your bills on time
  • Keep some distance between the credit you use and your maximum credit limit -this will demonstrate responsible borrowing
  • Keep older lines of credit open, since this indicates a longer credit history
  • Wherever possible, pay down higher balances, rather than transferring debts between credit sources
  • Settle any collections or past due accounts immediately
  • Monitor your credit report and dispute any inaccurate items — the most recent two years of your credit history are most important in determining your score

Your Credit Score