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Buying a home is a momentous occasion. Unless you're a real estate investor, it's not something that will happen too many times in your life. But many people refinance their homes at some point.
In addition to being a matter of pride, homeownership is an important financial tool. Your home is an investment for the future, and with the ability to refinance, you can use it to help your financial situation under certain circumstances.
There are five primary reasons why people refinance:
- To get a better rate if rates are lower than when they purchased their home.
- To change the term of their loan. For example, if someone has a 30-year mortgage and they want to pay it off quicker, they might refinance into a 15-year loan.
- To borrow additional funds.
- To switch the type of loan they have - from a fixed-rate mortgage to an adjustable and vice versa.
- To remove a co-signer from the loan.
It's very common for people to run into one of these five scenarios. People who own their home for thirty years are not necessarily on their first mortgage - even if they initially took a thirty-year loan.
For most people, there's no reason to think about refinancing immediately after purchasing their house. But it's always good to keep in mind that you have that option available to you. Situations do change, and sometimes, it's worthwhile for you to refinance even though you just became a homeowner.
The following are a few reasons people consider refinancing a home they just bought:
Interest Rates Drop
If your current interest rate is 4.5% and rates go down to 3.5%, it’s almost a no brainer for you to pay a visit to your lender. Even if the spread is less, it’s always good to talk to a professional you trust for more clarity on the costs vs. savings.
In Need of Cash
If your home is worth more than what you owe on your mortgage, and you need cash to pay for education, debt consolidation, or a variety of other reasons, you can refinance to pull out cash. You should always think twice before dipping into the equity of your house. Your primary goal should be to pay off your mortgage and save the money for later in life, but homeowners do cash out when necessary.
Experiencing a Tough Financial Period
It should never happen, but some people have to play with the term of their loan to lower their payment when they're in a tight spot. If they have a 15-year mortgage, they can switch it to 30 or 40 years. Switching to an adjustable-rate mortgage might also be an option in this scenario.
Income Significantly Increases
If you get a new job or an increase in your salary, you might want to consider paying your loan off quicker. If you have a 30-year mortgage, you could refinance and do a 15 or 10-year loan. The interest rate will be lower, but the payments will be higher because you'll be paying off the loan over a shorter period.
Conclusion
Every scenario is different, and every borrower is unique. To determine if you should redo your loan because of your circumstances, you should discuss your situation with a professional.
The loan officers at First Savings Mortgage have years of experience in helping their clients buy and refinance their home. If you need more information about refinancing or would like to discuss your situation, feel free to contact us. We're more than happy to help!
Please note, by refinancing your existing loan, your total finance charges may be higher over the life of the loan.