The False Myths of Mortgage

[Adam in CO]

Mortgage Myth: Never Refinance Your Mortgage
If you're a conventional thinker, you might be one of those people who feels the only mortgage for you is a traditional 30-year fixed-rate mortgage. Fine. But you may also think once the loan has been closed, you shouldn't have to think--or worry--about it ever again. But, like everything, times change, and if you're still treating your mortgage the old-school way, then you're probably in for a big surprise.

MYTH: YOU SHOULD NEVER REFINANCE YOUR MORTGAGE FALSE! Sure, there are times when you should leave your mortgage alone, but there are also times when refinancing could reap lots of rewards. Managing your mortgage wisely should be a part of how you manage your assets.
Lowering Your Monthly Payment
One of the biggest reasons many people refinance is to lower their interest rate which, subsequently, lowers their monthly payment. Let's say you got a loan with an interest rate at
7.5 percent; your loan amount was $100,000; and it's a traditional 30-year fixed. Your payment (without taxes and insurance) would be just under $700. Now, let's say rates have dropped down to 6.5 percent. If you were to refinance, your payment would drop to about $632. Now that you've refinanced, you're keeping nearly $70 more in your pocket a month that you could use toward other bills or just extra spending money. Over a year, that adds up to $840! Perhaps you can finally take that vacation to the Bahamas after all.
Refinancing from a Fixed to an ARM
Not interested in lowering your rate and payment? Fine. Let's say you have a home that you bought with a 30-year fixed-rate mortgage. But what if you have to move a lot? Many people in the military have to relocate themselves and their families quite often. This also goes for some people in sales where they get transferred often. Even if you don't have to move a lot, the average American family moves every seven to nine years. Keeping a 30-year fixed rate mortgage doesn't make as much sense in these types of situations as having a shorter-term adjustable rate mortgage (ARM) because the rates for a 30-year fixed are often higher which means you're paying more. Why pay more when you don't have to?
Refinancing from an ARM to a Fixed
Let's say you do have an ARM. Why would you need to refinance to a fixed-rate mortgage? Well, if rates are continually rising, as they were between 2004 and 2006, you'd want to keep your rate from increasing too high. Otherwise, you face increases in your monthly payment. In this case, you'd want to refinance to a fixed rate to avoid rising rates and payments.