Refinancing can have other financial benefits besides lowering rates. Locking in rates can protect you from higher rates, saving you money on future interest costs. You can also change your ARM for better caps to prevent huge monthly increases. Consolidating your bills with your equity saves on credit card rates while providing a tax advantage.
Protection From Future Rate Hikes
An adjustable rate mortgage (ARM) provides the lowest rates for home buyers, but these rates can increase. Monthly payments can jump a couple of hundred dollars a month depending on market rates and loan caps.
For those planning to stay in their home for more than seven years, it is a good idea to refinance to a fixed-rate mortgage if rates look likely to rise. Fixed-rate mortgages offer security from future payment hikes, but with slightly higher rates than ARMs.
Trading In For Better Caps
Many ARMs offer initial low set rates that can change after a couple of years. Jumps in payments can be surprising, especially if you have less than favorable caps. Caps set limits on how much and how often your payments can increase.
Refinancing your ARM can help you negotiate lower caps. You can also find an ARM with set rates for several years, just like with your original mortgage.
Helping To Pay Off Your Loan
Early payment of your home loan saves on interest costs. For those you need a structured approach to make larger payments, refinancing for a shorter term may be the answer.
For instance, exchanging your 30 year mortgage for a 15 year mortgage can reduce your interest costs by almost half, even at the same rate. Even with the origination costs, early payment will still save you money.
Taking The Tax Advantage
Mortgage interest is tax deductible, unlike interest on other bills. Cashing out part of your equity to pay off bills can give you a financial edge to get ahead. Be sure to make refinancing part of your larger financial goals to enjoy the full benefits.
Investigate lenders before you sign a contract to be sure you are getting the best financial offers. Ask about their APR to get a true understanding of the loan costs. Many financial companies post this information online, or you can request near instant quotes.
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Written by: Carrie Reeder