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Why a Refinance Can Still Make Sense

When someone first begins thinking about refinancing, typically it’s to get a lower rate. Of course, that is the most common reason but there are other very legitimate reasons to refinance an existing mortgage, other than lowering a rate on the loan. For homeowners here in Alpharetta and surrounding areas, homeowners can refinance to get out of a hybrid or adjustable rate loan, switch loan terms or consolidate bills. Let’s take a closer look at these three options.

An adjustable rate mortgage, or ARM, is one that can vary over time. The initial motivation for taking an ARM is the lower start rate. Home buyers who think they’ll only own the home for a few years before moving or otherwise retiring the note can choose the ARM and keep payments lower during that time. A hybrid is also an option and is so-called because while it is an ARM the initial rate is fixed for a specified period of time. A 5/1 hybrid for instance has a fixed rate for five years before turning into a loan that can adjust once per year. Like the ARM, a hybrid will have slightly lower rates than prevailing fixed rate loan. Yet once that initial fixed period is over, homeowners can refinance out of the hybrid or ARM and into the stability of a fixed rate loan.

Switching loan terms is another option. The most common loan term for a mortgage is 30 years. The longer term provides the lowest monthly payment compared to a shorter term loan. The flip side with the 30 year term is the amount of interest paid over the life of the loan. You get a lower payment, but you pay more over time. A shorter term loan will have a slightly higher payment but much less interest paid.

Take a $300,000 year loan amount and a 30 year term at 4.25 percent. The monthly payment is $1,475 and over the term of the loan the amount of interest paid is a little over $230,000. If you take a 4.00 percent rate using a 15 year fixed on that same loan amount, the new payment is $2,219. Higher payment, yes, but the amount of interest paid is just $99,420. Homeowners can also decide to switch to a shorter loan term that coincides with reaching retirement age.

Homeowners can also refinance in order to consolidate debt and lower overall monthly payments. Higher interest credit cards and automobile loans can be paid off with a cash-out refinance loan, lowering the total amount of interest paid. For instance, someone might be able to save $500 per month with a debt consolidation loan and either use those savings to put into a retirement account, pay down the existing mortgage or a little bit of both.

If any of these scenarios make sense to you, give me a call and let’s run some numbers together.

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