When to Refinance a Mortgage

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Loan	Rate	APR
30 Year Fixed Rate	3.88%	3.38%
15 Year Fixed Rate	4.06%	3.61%
5/1 Adjustable Rate	2.75%	3.37%
* These rates are averages, and might not apply to you.

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Although mortgages are set for long terms such as twenty to thirty years, home owners usually have the opportunity to refinance their mortgages at regular intervals. For example, they may choose to re-sign at one year, three years, or even five years. Traditionally, financial institutes have offered different interest rates and bonuses depending on the contract that they wish to promote and the one that they want customers to consider. A five year contract may be at a reduced rate over the one year because the lender is guaranteed that income for five years. And if interest rates decline during the five years, the lender enjoys larger profitability.

Generally speaking, everyone refinances their mortgage when the contract is set to expire. At that time, many lenders will take the amount owing and the new interest rate and recalculate the monthly, bi-monthly, or weekly payments. Then you sign the agreement for another period determined in the contract. Other lenders, such as hard money lenders, may agree to continue a mortgage at the same rate and payment schedule. This is usually the case when mortgages are one-year terms. You have to decide whether this is advantageous to your circumstances or not. For some, there may not be any other alternative, and for others, the convenience of this type of mortgage may be more important than interest rates and reduced payments.

Admittedly, there are definitely times when you should refinance a mortgage. The first and obvious time to refinance is when interest rates are lower. By locking into a reduced your rate and keeping the same payment, you reduce the time it takes to pay off your home. Your money is going to principal and less to interest, and this has to be one of the main benefits of home loan refinances.

Second, refinancing your mortgage when you have some money to apply to the total amount means that you have more equity in your home. Should you require the funds in the future for a rainy day, you have your home mortgage upon which to fall. Also, the money you save by reducing your mortgage, assuming you make lower payments, can be used for something else like a vacation at the end of the year. On the other hand, after making the down payment, and keeping the original payments in effect, you reduce the cost of the mortgage dramatically.

Third, many people agree to variable rate mortgages because they are willing to gamble that interest rates will remain constant or decline. But in most instances, the home owners become weary and frightened from the constant fluctuations. Being able to refinance the mortgage allows a home owner to lock in at a fixed rate, thereby reducing the stress of the original mortgage terms.

Fourth, by keeping your mortgage in good standing and having an excellent credit record, you may be able to capitalize on reduced rates as a preferred customer.

Finally, should the need arise that you must have available funds for some sort of emergency, refinancing a mortgage might make perfect sense.

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