Refinancing can help your finances in more ways than just by lowering your rates. Locking in rates can protect you from rates going up, which could cost you more money in the future. You can also change your ARM to one with better caps to keep your monthly payments from going up a lot. When you combine your bills and equity, you save on credit card rates and get a tax break.
Rates won't go up in the future
A mortgage with an adjustable rate (ARM) gives buyers the best rates, but the rates can go up. Depending on market rates and loan caps, monthly payments can go up by a few hundred dollars a month.
If rates are likely to go up, people who plan to live in their home for more than seven years should switch to a fixed-rate mortgage. Fixed-rate mortgages give you peace of mind that your payments won't go up in the future, but they have slightly higher rates than ARMs.
Getting better caps by trading in
Many ARMs start out with low rates that can go up or down after a few years. Jumps in payments can catch you off guard, especially if your caps aren't good. Caps limit how much your payments can go up and how often they can go up.
If you refinance your ARM, you might be able to get a lower cap. You can also get an ARM with rates that stay the same for a few years, just like with your first mortgage.
Making it easier to pay off your loan
When you pay off your home loan early, you save money on interest. Refinancing for a shorter term may be the answer for people who need a plan to make bigger payments.
For example, if you switch from a 30-year mortgage to a 15-year mortgage at the same rate, your interest costs will drop by almost half. Even with the costs of starting the loan, paying it off early will still save you money.
Using taxes to your advantage
The interest on a mortgage is tax-deductible, but interest on other bills is not. You can get ahead financially if you use some of your home's equity to pay off bills. Make sure that refinancing fits into your bigger financial goals so you can get the most out of it.
Investigating Lenders
Before you sign a contract, look into lenders to make sure you're getting the best deal. Ask about the APR to find out how much the loan will really cost. You can find this information on the websites of many financial companies, or you can ask for quotes almost right away.
