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What are the advantages of mortgage refinancing?

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The benefits of refinancing your mortgage vary depending on whether you use rate-term or cash-out refinancing. Rate-term financing allows you to reduce your interest rate and reduce (or increase) your monthly payments while cash-out refinancing gives you quick access to a large quantity of funds. Here's how these advantages play out:

• Reduce Interest Rate: If you originally took out a fixed-rate loan and the interest rate has since dropped, you can refinance at this lower interest rate and save money. On the other hand, if you currently have an adjustable rate mortgage, you could reduce your risk by switching to a fixed-rate mortgage. Finally, if you've improved your credit since taking out your first loan or if you originally took out a jumbo loan, you may qualify for a lower interest rate with your new credit rating and reduced principal balance.
• Reduce Monthly Payments: If you're having trouble making your loan payments, there are two ways to use refinancing to reduce your monthly payments. First, if you reduce your interest rate, your monthly payment will drop. Second, you can take out a longer-term loan so that your loan is spread out over more payments.
• Increase Monthly Payments: If you refinance for a shorter-term loan, you will increase your monthly payments but reduce the total amount of interest you pay on your loan. In addition, you will build up equity more quickly than you would with your existing loan.
• Get Cash: Assuming you have at least 5-10% equity in your home, you can perform cash-out refinancing and obtain cash for large expenses such as college education and home improvements.
• Consolidate debt: Using cash-out refinancing, you can pay off all your other debts and consolidate your debt into the single mortgage.

An interest rate drop as little as 1/2% could make refinancing worthwhile, and the access to immediate cash can be very helpful in renovating your home. Don't rush into refinancing, however; consider the disadvantages as well as the advantages.

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