Index | Home Loans | Refinance

Refinance

Refinancing is the replacement of an existing debt obligation with the proceeds from a new loan, which has different terms. The same property can be used as collateral. Generally, refinancing is about getting more favorable lending terms and conditions, which are meant to reduce overall borrowing costs. The monthly payments you owe on the loan may be altered in two ways: by changing the loan's interest rate, or by changing the term to maturity of the loan.

Refinancing is taking out a new loan, which may come from the same lender you have been with for several years or from a different lender who now will take care of paying out your existing loan.

The most common consumer refinancing is for a home mortgage. Home refinancing is applying for a secured loan to pay off a loan that has already been secured with some property or assets. To determine if a mortgage refinance is the best solution in your particular situation, you need to make sure that you will be saving more on interest than if you were paying out in refinancing fees.

Refinancing your home mortgage loan can provide you with the money needed for some serious purpose, like starting a business, paying for your children's college, financing an early retirement etc. When pulling your home equity out by refinancing, you get some extra cash to solve your current financial problems, but you also start to owe more on your home.

There is a "cash-out" refinancing scenario, in which you can take the extra funds as cash by refinancing for an amount higher than your current principal balance. You may opt for cash-out refinancing if you need money for paying off high-interest rate bills, remodeling your home, sending your children to college etc.

One of the major reasons why borrowers choose to refinance is to get a lower interest rate. Refinancing may also be undertaken in order to extend the repayment time, to pay off other debts, to raise cash for investment, or the payment of a dividend, or to reduce or alter risk associated with an existing loan.

For example, you may wish to refinance variable-rate loans, as interest rates on these loans may increase dramatically at some point. In case you refinance an adjustable-rate mortgage into a fixed-rate one, the risk of such increase will be removed, and you will get a steady interest rate.

The major reasons why people choose to refinance are largely the following: home renovations, paying off debts by rolling them into your home loan, getting a cheaper rate, raising cash for a purchase, switching from a fixed rate to a variable rate or vice versa.

If you have made up your mind to switch your fixed-rate mortgage for another type of loan, make sure you know all the terms of the new loan you have chosen. Besides adjustable-rate mortgage, consider the advantages of such types as ARM variations, interest only mortgage, balloon mortgage, reverse mortgage etc.

Mortgage refinancing can also change your term from a 30-year period to a ten or 15-year period. It allows you to save a substantial amount of interest. If you obtain a lower interest rate keeping the same monthly payment amount, it will allow you to enhance the equity in your home.

Consider refinancing if you want to get your monthly payments reduced and save more by getting a low rate or by getting your loan term extended. If you want to pay down your mortgage quickly and become debt-free in a shorter time, you can reduce the loan term. Your monthly payments will go up; however it will enable you to save more in the overall interest payment.

You may wish to consolidate two loans into one if there is enough equity. Consider consolidating first and 2nd mortgages with refinancing into a single first mortgage. The monthly payment on the new loan will be lower than the combined payments on the first loan and the second mortgage.

Before you decide to refinance, check if current market rates are low. There is that 2-percent Rule, according to which you benefit from a home refinance if you get an interest rate 2 percent lower than that on your current loan.

When considering refinancing, it is important to think of its drawbacks as well. For example, in order to figure out costs and how long it will take you to break even on the refinance in particular, you should add up all the fees, get the difference between your old mortgage payment and your new payment and then divide that difference into the loan fees. This figure will equal the number of months you have to pay on your new loan to break even. When refinancing, you might not qualify for the higher payment to shorten the amortization period, and it may turn out that the term of your loan will be extended. Refinancing also means a bigger mortgage.

Refinancing does not make sense if your property value reduces. In case your property value goes down and you refinance up to 80 percent of the reappraised value, the new loan won't be enough to help you pay down the existing one. If you are paying off the first loan for a long time, then refinancing your loan to another 30 years is not a good option as it may only increase your overall payment. Also, refinancing may not be the answer if you have used up enough equity of your home value in taking out a mortgage or home equity loan. In case you have a few years left on the current loan, there is no sense in refinancing with a long term loan.

One should consider refinancing if there is a possibility of a substantial cost savings, or if weak cash flow or other financial commitments make you want to extend the loan. When making a decision whether or not to refinance, calculate the up-front, ongoing, and potentially variable costs of refinancing. Before you commit to any loan product, make sure you read all the fine print. In case you don't understand or agree with some of the terms, consult with your lender or real estate professional. For instance, watch out for terms that include "negative amortization." This is an unethical practice which is meant to reduce the interest rate at the origination of the loan, but results in a higher amount borrowed due to adding that rate discount to loan principal.