Home Mortgage Refinancing Explained
Article by BillM
Refinancing is often considered one of the most beneficial ways to save money on your home mortgage. Refinancing is when you renegotiate the terms of a loan, essentially the refunding or restructuring of debt with new debt, equity, or a combination of both. Refinancing is basically taking a new mortgage to replace an old one. Refinancing is often the best way to save money, get a lower interest rate and a lower monthly payment, or keep the monthly payment the same and have a shorter loan term. Refinancing is used in most cases to improve overall cash flow.
There are many things that play a role in whether or not refinancing is a good move. Calculating the up-front, ongoing, and potentially variable costs of refinancing is an important part of the decision on whether or not to refinance. Sometimes, refinancing is an appropriate way to resolve financial problems. Refinancing is not advisable if you plan to move in next few years, because the price that you pay for the refinance will just reduce or negate the savings that you get from the interest rate or lower monthly payment. Another obstacle to refinancing is the current slump in the housing market where values of many homes have decreased to below their purchase price. If cash flow is an issue and refinancing isn’t available, try to work out a plan with your lender to modify your current loan that would allow you to make either a smaller payment, or to miss a payment until you have the funds.
In the context of personal finance, refinancing a mortgage can be used to pay off high-interest debt such as credit card debt. Debts can be paid and revolving accounts satisfied so that the homeowners credit is not ruined. If the borrowers have wisely used their time and opportunities to establish a positive credit history, this should be a benefit to them. You may be able to secure a lower interest rate because of changes in the market conditions or because your credit score has improved. If your credit points have been decreasing in recent years, lenders may not endorse the refinance.
Refinancing may be undertaken to reduce interest rates, to extend the repayment time, to pay off other debt, to reduce or alter risk (such as by refinancing from a variable-rate to a fixed-rate loan), or to raise cash for investment. As part of the mortgage refinancing process, various information that was required for your first mortgage will again be needed (such as your financial records and credit reports for you new loan report.) You should know how much you will pay in all (interest and principle together) as well the term over which you will be making payments. Interest rates and number of credit points determine the total cost for a second mortgage refinancing. Most refinancing lenders offer a variety of combinations of points and interest rates. Paying more points typically allows one to get a lower interest rate than one would be capable of getting if one paid fewer or no points. A general role of thumb is that refinancing becomes worthwhile if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. The average cost of refinancing is usually in the range of three- to six percent of the value of the loan, plus any prepayment penalties and charges associated with paying off any second mortgages that may exist.
Though banks have been directed to tighten their credit purse strings by stiffening their loan qualification criteria somewhat, as long as homeowners have done their part by paying their mortgages on time, it’s likely that they’ll have very little trouble finding a lender to accommodate their wishes. If you decide that refinancing is not worth the costs, ask your lender whether you may be able to obtain all or some of the new terms you want by agreeing to a modification of your existing loan instead of a refinancing. Whether refinancing is right for you depends upon your own personal situation with regard to your financial objectives and goals.
About the Author
Bill leverages his 18 years of experience in the financial services industry to write informative articles for the non-industry reader. His site can be found at www.hotmortgagedeal.com