advice and guidance

Most homeowners are happy with their 15- or 30-year mortgage, but under certain circumstances, you may want to refinance out of a standard mortgage. Here are four main reasons why.

Reason #1: Lower Your Rate

Lower rates and better credit are two popular reasons to refinance a mortgage, and you can lower your payment immediately, depending on the situation:

Are rates dropping? Of all the requests for refinancing mortgage loans, the most popular is that people want to lower their monthly payments with a lower interest rate. This will depend on market conditions. Take a look at the market to see where current market trends are heading. If rates are better now than they were when you first signed your mortgage papers, you may want to look into refinancing.
Is your credit improving? If you got your original loan when you had less than perfect credit, you may have had to settle for sub-prime rates. This is a good time to rebuild your credit rating. If you have been diligent in making your mortgage payments on time and if you haven't made late payments on other debt, your credit may have improved to a point where you could refinance with a prime rate. It's always important to know what your credit score is, and this is just another way to take advantage of knowing that your scores are better.

Reason # 2: Improve Your Equity Position

If you have made considerable gains in the amount of equity in your house, it might be a good idea to examine your mortgage. Your home may have appreciated or you might have paid off a considerable amount of the principal. If so, refinancing the terms of your mortgage could help you lower your monthly payment by simply lowering the principal balance that the payment is based on. Also, if you have private mortgage insurance (PMI) or a piggy back loan, you might be able to get rid of the PMI or the second lien by refinancing and restructuring your loan.

Reason # 3: Shorten or Lengthen the Loan Term

Shortening or lengthening the term of the mortgage is another good reason to refinance.

Shorten the term: If you are currently in a 30-year fixed mortgage, refinancing to a 15-year fixed mortgage will help you pay off the loan quicker and gain equity faster. Even though 15-year mortgages can sometimes have higher monthly payments, because the payment term is cut in half, you are paying less interest and the total cost will be substantially lower. Sometimes you can actually keep the same payments while moving to a 15-year term, but that's more likely to happen during extremely favorable market conditions or if your principal balance is substantially lower than the original balance when your current payments were figured.
Lengthen the term: If you are currently in a 15-year mortgage, you may want to refinance into a 30-year term to save on monthly payments. This is a good option if you want to save each month for anything from college tuition to investment vehicles. Since the new loan is now stretched out for 30 years, your payments will be much lower.

Tip: If you still want the option to be able to pay off the loan earlier than 30 years, make sure you don't have a hard prepayment penalty associated with the new loan.

Reason # 4: Get Cash

Cash-out and home equity laws differ from state to state, so be sure to check with a mortgage professional to find the loan-to-value (LTV) requirements in your state. Here are some common reasons for people wanting to get more cash out of their mortgages:

Debt consolidation: It might be a good idea to use your mortgage as a way to consolidate debt. If you have found that your debt has gotten out of hand, the interest rates keep adjusting, and your payments keep getting higher and higher, you can use the equity in your home to consolidate that debt and ultimately save money. You can refinance with a cash-out debt consolidation loan. Basically, you will be refinancing and borrowing additional money against the equity in your home to pay off credit cards, student loans, installment loans, and any other debt. If your debt-to-income ratios are too high, you may need to pay these debts at the closing table in order to qualify. Otherwise, you can get the money and pay off the loans as you see fit.
Home improvement: Many people like to use their home's appreciation and added equity to move up into a bigger and better house as their income, tastes, and needs change. Whether it's because you're having kids or just feel the need for a media room, home office, in-law suite, or a swimming pool, more and more people are choosing to remodel or improve the house they already own. This is a great alternative to moving out and buying a different home. If you don't have the money in your checking account or your great-uncle didn't leave it to you, you can refinance your house and pay for the remodel by taking cash out or getting a home improvement loan. Some lenders offer loans based on the equity of the house once the work is complete and use the "subject-to-completion" value to determine the LTV ratio.
Extra cash: Sometimes, you just need some extra cash. Whether you need some emergency money, you want to pay college tuition, or you just found a great investment, you can borrow the money against the equity in your house. Whatever the reason, if you have enough equity due to appreciation or principal reduction, a cash-out refinance has helped many people in times of need.

Regardless of your reason for refinancing, make sure you keep tabs on current market conditions. Are rates on the rise? Obviously, if you're trying to refinance to lower your rate, the market will be the best indicator of whether or not you should do it now, or wait until rates are more favorable. Extenuating circumstances and exceptions to the rules always exist, but for the most part, refinance only if the benefits exceed the cost.

Source: eSchool - Mortgage and Home Buying