A few decades ago, few people knew about refinancing a home loan. Most people who decided to buy a house got a 30-year fixed-rate mortgage and made monthly payments until the loan was paid off. But times have changed, and on the mortgage market today, it's more likely than not that most new loans will be refinanced at some point. Even if a loan is for 30 years, the average loan today is not likely to last longer than 30 years because owners often switch from one loan to another.
There are many reasons, and they are all good ones. Here are some reasons why a homeowner might want to refinance his or her mortgage:
Get a fixed interest rate. Interest rates were at or near all-time lows three or four years ago. Instead of getting a fixed-rate loan, many buyers chose an adjustable-rate loan, which had lower payments and let them buy more house for the same amount of money. Since then, rates have been going up steadily, so many of those buyers now want to switch from loans with variable rates to mortgages with fixed rates.
Lower interest rate: When interest rates go down, people who have loans with higher rates often want to switch to ones with lower rates. When interest rates go down, monthly payments go down, too.
Get a longer loan term. A buyer may have taken out a 15-year loan but then decided that the payments were too high for him or her. By refinancing and switching that 15-year loan for a 30-year loan, the monthly payments would go down, but it would take twice as long to pay off.
Borrow money: The "cash out" refinance has become very popular over the past five years, as rates have gone down and prices have gone up. Many owners have found out that their property is worth a lot more than they paid for it. With that equity, thousands of people have gotten new home loans while taking cash out of their equity to use for home improvements, debt consolidation, or any number of other things.
Refinancing is often a good idea, but homeowners should know that there are usually closing costs of several thousand dollars. If you want to refinance your mortgage, you should think about how long you plan to stay in the house. If it's been more than a few years, you might want to get a new mortgage, especially if it will lower your monthly house payment.
