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Examining the Benefits of Refinancing

There are a number of reasons to consider refinancing the loan on your home. Some people refinance as a way of taking advantage of lower interest rates, enabling them to reduce their monthly mortgage payments. Some refinance to a shorter-term mortgage, which enables them to build equity in their homes faster. And some homeowners refinance to tap into the equity they've accumulated in their houses, using the funds for home improvement or other needs, such as debt consolidation or their children's education.

Do you want to take advantage of these benefits, but wonder if refinancing will be worth the time and money you'll need to invest? Do you feel unsure about the entire refinancing process?

Don't worry. The refinancing process is very simple. It involves paying off your existing mortgage loan and taking out a new one on the same house. Your new mortgage loan could be at a more attractive interest rate, or for a different term. Or, you could get an entirely different type of loan for example, you could switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.


Questions to Consider

When considering whether to refinance, you need to consider the following questions:

  • What are your reasons for refinancing?
  • How long do you plan to stay in your home?
  • How much equity do you have in your home?
  • What is the interest rate of the existing mortgage?
  • What is the interest rate of the new mortgage?
  • What is your current income and credit status?
Refinancing Options and Scenarios

Let's look at some refinancing options (for more details about these loan types, visit the Buying a Home section of this site, and choose Your Credit).
ARM to Fixed-Rate. One of the more popular types of refinancing involves moving from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. For example, you may have gotten an ARM to take advantage of the lower, fixed interest rates that such loans typically offer during an initial period (usually anywhere from three to ten years). After this initial period, however, your ARM payments adjust with market changes in interest rates for example, when interest rates go up, your monthly payments usually go up. With a fixed-rate mortgage, your interest rate stays the same for the entire term of the loan, making it a stable, predictable option that can be especially attractive if you're refinancing to a fixed-rate loan when interest rates are low.

Fixed-Rate to ARM. If you have a fixed-rate loan and you don't plan to stay in your house for many more years, and if initial interest rates for ARMs are lower than your current loan, you may want to switch from a fixed-rate loan to an ARM. This option could, for example, help you save money on your mortgage payments for several years while you wait to move to a new home.

ARM to ARM. You may be interested in changing from one type of ARM to another, to get a better rate and term, or you may be interested in refinancing with the same type of ARM, to get a lower interest rate. Be sure to compare your existing ARM's financial index, margin, and rate caps with current market rates before you decide to refinance to another type of ARM. It is important to understand how often your mortgage will adjust, as well as how much your payment can change with each adjustment, and over the life of the loan. In addition, be sure to see if any conversion terms apply, or if there are costs to convert to another type of mortgage from your current one.

Tapping into Equity. Since you first started making monthly mortgage payments, part of your payment was used to pay principal helping you build equity in your home while the rest went toward interest, taxes, and insurance. Drawing on the equity in your home, often referred to as a "cash-out" refinance, provides an easy way to tap this source of savings and use it for other purposes, such as home improvements or a child's education. In addition, because mortgage interest usually is tax-deductible, you also can use a cash-out refinancing to pay off debts that have non-deductible interest costs. Consult a tax advisor for additional details about this option.




Refinancing for Home Improvement

Have you been dreaming about improving your home and wondering how to best pay for those improvements? A "cash-out" refinance (described in the previous section) may give you a better rate on your mortgage as well as the ability to use some of your home equity to pay for home improvements.

Equity is your financial interest in your property the difference between your property's fair market value and the amount you owe on your mortgage. As a homeowner, you've been building equity in your home since you first started making monthly mortgage payments: Each time you make a mortgage payment, a portion of that payment is used to pay off your loan principal helping you build equity while the rest is used to pay interest, taxes, and insurance.

By refinancing your mortgage and borrowing funds against your equity to renovate your home, you can turn your current house into one that's closer to your dream home. With the right financing, you can do it economically financing your home improvements with a new, lower-interest first mortgage may save you money when compared with home-improvement alternatives that can carry higher interest rates, such as home-equity loans or lines of credit.

When beginning the home-improvement process, think about the improvements you want to make and why. Do you want to expand your kitchen to make it more functional? Will an addition give your family more room? Will cosmetic changes help make your house more marketable when you decide to sell it? Answering such questions will help you prioritize projects and use your refinancing funds efficiently.


Consider Energy Efficiency

If you use your refinancing funds to increase your home's energy efficiency, you can realize additional savings each month by lowering your utility bills. Energy efficiency questions to consider include:
  • How efficient are your home's heating, ventilation, and air-conditioning (HVAC) systems?
  • Are there any serious plumbing problems?
  • What are the usage patterns, based on past utility bills? What areas show potential for improvement through upgrades or replacement?
  • How is the insulation in the walls, ceilings, attic, floors, and crawl spaces? If the house has siding, what kind of shape is it in?
  • How old is the roof, and what condition is it in?
  • How old are the windows? How well do they seal?
  • Are your appliances energy efficient?
If you'd like more information about refinancing or the loan-application process, please continue on to the Refinancing Details section of the site, or visit one of the other sections available in the navigation bar at left. Otherwise, if you're ready to refinance, please visit the Apply Now section of our Web site. If you have questions during the application process about what type of refinancing package best suits your needs, please contact our Mortgage Center at 1-800-995-3192 for more information.

 

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St. Augustine, FL 32080


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