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Home refinancing options
You have a variety of options for refinancing your mortgage, including:
- Convenience. Refinancing to combine a first and second mortgage into one payment saves time and effort that occur when you make payments to multiple lenders. Consolidating a first and second mortgage also opens a junior mortgage lien position on your home if you decide to take out a home equity loan or line of credit in the future.
- Lower payments. Perhaps you want to ease the burden of making payments on a 15-year mortgage loan by refinancing with a 30-year mortgage. Stretching out your loan term reduces your monthly payments. If you refinance to lower your payments, however, make sure your new mortgage doesn't impose a prepayment penalty: With the windfall that comes from lowering your payments, you may occasionally have the resources to pay an extra amount.
- Consolidating other debts. You may want to refinance in order to pay off an auto loan or credit card debt. After all, the interest on a mortgage or home equity loan is tax-deductible in most cases, while the interest on consumer debt is not.
- Making fixed payments. To help you plan with more certainty, you may want to lock in a fixed monthly payment that occurs when you refinance an adjustable-rate mortgage with a fixed-rate mortgage loan.
- Eliminating mortgage insurance. If the loan-to-value (LTV) ratio on your original home loan was more than 80%, your lender likely required you to obtain private mortgage insurance. PMI protects the lender in case a borrower defaults on a loan, which has a greater probability of occurring for high-LTV loans. Annual PMI payments can easily top $1,000.
While the Homeowner's Protection Act requires your lender to notify you when the LTV drops below 80%, they are not required to stop charging you for mortgage insurance automatically. If you think your LTV is low enough and your current lender is reluctant to drop PMI, refinancing with a lender that won't charge PMI may make sense.
In short, your options for refinancing are only limited by the marketing skills of savvy lenders. You may find that your current lender, eager to hang on to your business, offers you the best refinancing terms.
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