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For most families, their home is their biggest asset. Unlike most things we purchase, a home typically increases in value over time, building equity and therefore net worth. There are many ways to take advantage of this equity and put your home's value to work for you - I've helped many clients meet financial goals they thought were years away! Here are some great reasons to refinance and ways to do it:



Rate/Term Refinance - This is what most people think of when they hear refinance. In this scenario you would take out a new loan for the remaining balance on your mortgage, likely at a lower interest rate. Most refinances either reset the term of the loan to 30 years for a lower payment or 15-20 years for a quicker payoff.


Convert an ARM to Fixed - For buyers who financed their home with an adjustable rate mortgage it may eventually be a smart idea to refinance the loan to a fixed rate. If, at adjustment, the rate for the ARM would be higher than fixed, refinancing to a fixed rate would result in a lower rate and no stress about future rate changes.


Keep in mind that the opposite of this situation can also be true. In a market where the interest rates are falling it could be a smart decision to refinance into an ARM, where the periodic adjustments allow a homeowner to take advantage of the decreasing rates without paying the costs of a refinance each time. This strategy would work best for homeowners who don't plan to be in their house for the long term.


Cash-out Refinance - This type of refinance allows homeowners to tap into the equity of their home and put that value to work in other areas. A cash-out refinance is any refi where the balance on the new loan is higher than the loan being paid off. For example, your house is worth $400,000 but you only owe $200,000. You decide to take out a new loan for $250,000, paying off the original mortgage and using the $50,000 for other things. Many people use these funds to consolidate debt, renovate their home, or cover major expenses.


While this can be a financially sound decision, repeated refinancing of your home loan is rarely a good idea. Many homeowners take out a larger mortgage to refinance debt but then turn around and run up those credit card balances again, putting themselves in a worse financial situation than before. Always be sure that your refinance is truly going be in your best financial interest - talk to a trustworthy lender!

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