Why do Homeowners Refinance?

Wonder why homeowners like to refinance their mortgages? The reasons vary between homeowners but tend to be similar. Some homeowners refinance their mortgages because they simply want lower rates. However, as of July 2014 the average mortgage loan rate for a conforming 30­year­fixed rate mortgage has only increased from 4.28% to 4.32 according to the Mortgage Bankers Association (MBA).

Reducing mortgage rates is just one of many reasons. Another reason is either to shorten or to extend the term of a loan. With good rates it might be convenient to refinance and pay­off the loan within 15 years. Payments made within a shorter time frame could mean the difference between an early or late retirement. One thing for homeowners to keep in mind when refinancing is that 12 consecutive payments within the last 12 months must have been made in order to refinance. A verification of mortgage (VOM) will ascertain this, as it is required in a refinance.

Homeowners that do meet the requirements and provide proper documentation can then focus on going through with new financing. If rates are low, it would be a good time for homeowners to adjust or transition from adjustable rate mortgage to a fixed rate loan.

Homeowners usually start off with adjustable rate mortgages (ARM). These mortgage interest rates and payments can vary from low or high depending on the prime rate, and with time they can change. The fact that payments and interest rates can increase at any moment tends to worry homeowners. On the other hand, fixed rates set interest rates from the beginning of the loan and remain the same rate until loan is paid off. Choosing this type of mortgage at a time where interest rates are low can be a smart and convenient decision.

One final reason we’d like to mention as to why some homeowners may refinance may be because of the availability of equity. Homeowners can choose to cash out their home equity and either use it to invest it into something such as renovations for the house or even to start their own business. Keep in mind that payments will need to be made on a monthly basis to pay back the equity line. This is a viable option for good money managers.