Exactly What Mortgage Refinancing Means

Exactly What Mortgage Refinancing Means



Depending on how the prevailing interest rates in the markets behave at any given moment, you may hear quite a bit about home refinancing. Is it right for you? Answering that question takes a fair amount of calculation and consideration; however, you should understand exactly what a mortgage refinance means and why people do it before you jump to any decisions. Refinancing your home is not always the best alternative. What is Refinancing?


A home refinance is the same as a mortgage. Basically, you replace your existing mortgage with a new loan containing different terms. You have the same options available as you did at the time of application for your original mortgage loan and all the fees and closing costs remain roughly the same. You may even work with the same mortgage representative and title company. Why People Refinance People refinance for a variety of reasons. Among the most common reason is to get out of an adjustable rate mortgage (ARM) before the fixed rate expires. Once this occurs, the interest rate and monthly payment can jump around, making it close to impossible to create a successful household budget based on your mortgage expense. Lowering your interest rate is another primary reason to refinance your mortgage. Consumers buy homes in any interest rate environment. Perhaps a builder offers you a discount you cannot pass up or a house you've always loved in your neighborhood goes on the market. Not even industry experts turn down home ownership simply because interest rates are not at their 10-year low. Once rates drop, it's natural to want to trade in your old seven percent interest rate for a shiny new five percent rate. Sometimes, borrowers want to modify their payment amount. Your payment is a function of three things - interest rate, loan term and amount financed - so altering any combination can create a drastic change. In most cases, you want to decrease your payments and can do so by taking advantage of a lower interest rate, but extending your term back to 30 years when you've already paid seven years off your existing 30-year note will also do the trick. The mere fact that you've paid down your original principal balance may lower your payments, even without a substantial decrease in your interest rate. In some cases, you may find it beneficial to increase your payments in order to pay off your mortgage faster. Although a refinance is unnecessary to do so, making the conscious effort to send in double payments or an extra payment every six months is too difficult for some people. There's nothing wrong with that. Refinancing your 30-year mortgage into a 15-year mortgage increases your payments and cuts your term in half. Surprisingly, your new payments are not double the old amount because you've cut your overall interest cost by almost half. Is Refinancing Right for You? Now that you know the reasons why other people refinance, it's time to determine if you should jump on the bandwagon or keep your existing mortgage as it is. Ask yourself a few basic questions to start the decision-making process: How long will I be in my home? This is by far the most important thing to know before you begin a home refinance. If you have plans to move, or have a job that might require relocation, within the next five years, refinancing is probably not in your best interest. Refinance fees and closing costs can equal several thousand dollars. That means you'd need to find a vastly lower interest rate in order to recoup the cost of refinancing before you move. Keep in mind that if you took out a high-risk mortgage due to bad credit and have increased your credit score to qualify for standard interest rates, you stand a better chance of recouping your costs before moving. Can I afford my monthly mortgage payments? With a conventional mortgage, the answer to this question should be yes, unless you experience an unexpected loss of income or increased expenses because your payments do not change. If you have an ARM and the rate is about to expire, this is a different story. Some ARM contracts allow the interest rate to increase a full four percentage points during the first adjustment. Once this occurs, you may be unable to meet your obligations because of the higher payments. In this case, it makes sense to refinance your loan to a fixed-rate mortgage with payments you can afford. Remember that your mortgage representative is your greatest resource during the refinance process. An ethical lender will listen to your refinance goal and let you know if refinancing is right for you. Just be sure to work with a company and representative you trust. Allan Young is a freelance writer who writes about real estate and mortgage refinancing.


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Mortgage Refinancing, Real Estate, Mortgage Quote, Adjustable Rate Mortgage, Credit, Line of Credit, Home Equity,









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