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What is Refinancing?

What is refinancing? - Refinancing is the paying off of your current mortgage and obtaining a new mortgage to take its place. Why would you want to replace one mortgage with a new mortgage you may ask. There are many different reasons why people refinance their home mortgage loans.

In recent months the majority of refinances have been cash-out refinances. During a cash-out refinances, the original mortgage or mortgages are paid off with a new, larger mortgage. The extra amount, which reduces the equity in the home, is often used to pay off other debts, such as credit cards, as well as give some cash to the home owner.

The most common reason for refinancing is to get a lower interest rate.

Other reasons to refinance include: converting from an adjustable rate to a fixed rate, debt consolidation, changing the term of the loan or taking cash out in a lump sum.

Many people take cash out of their equity to pay for some of life's biggest expenses. With college tuition reaching record highs, some people choose to refinance with cash out to help with the cost of starting school. Other people refinance with cash out to expand their homes, often adding new rooms to accommodate their growing family. Some people will pay off other debts with cash out of their equity because interest rates for home loans are generally much lower than credit card unsecured note rates, and interest paid on your mortgage is usually tax deductible.

Over the past couple of years, many people have financed in adjustable rate mortgages because of the attractive low interest rates. Now that the fixed period is expiring, many are refinancing into Fixed rate mortgages to lock in their payments and avoid adjusting interest rates.

When Should I Refinance? - One factor to consider is the cost involved. If your closing costs on a refinance are high, and the amount youre saving per month is low, it doesnt make a lot of sense.

If credit card debt is piling up, and you have some equity in your home, it is sometimes a good idea to consolidate that debt and roll it into your mortgage, if the payments make sense in the end.

The most common reason that most people are refinancing currently is to lower their monthly payments/expenditures. While rates have crept up, they remain at historically low levels. This means that you may still qualify for a very low interest rate on a home loan while being able to pay off credit cards or other higher interest rate loans (whose interest is not tax deductible) and save money on a monthly basis. Please call me to discuss.

A good time to refinance is when you currently have an adjustable rate mortgage and the short term fixed rate is getting ready to adjust. For example if you have a 30 year mortgage on a 3/1 ARM that would mean that your interest rate will be fixed for the first 3 years of the mortgage loan. After the first 3 years are up, the interest rate will adjust and then it will continue to adjust once every 12 months (once per/year) thereafter for the remainder of the loan. Usually, this is a good time to look into refinancing. Consult your mortgage professional to see what your options are and what types of mortgages you will qualify for.

Another reason to refinance is to shorten your term. If you have been paying on your current mortgage and would like to save thousands of dollars off the remaining balance, shortening to a 20 or 15 year amortization may help.

One of the most common reasons for refinancing a home is to lower your monthly payments. You may lower your payments by lowering your interest rate, extending the term of your mortgage or a combination of both.

For example: You bought your home with a mortgage of $100,000 with an interest rate of 9% and a term of 30 years. Your monthly principal and interest payment is $804.62. You have lived there for some time now and reduced the principal balance on your mortgage to $80,000. You are approved for a new mortgage at 7%. Your closing costs are $5000. Your new loan amount will be $85,000 (you're including the closing costs in your new mortgage.) Your new principal and interest payment will be $565.51. You will save $239.11 every month!

You can use that extra money to compensate for a decrease in income or increase in expenses. Or, if your income and expenses have remained stable, you can put that money into a savings account or use it to pay down the principal balance of your mortgage.

In some cases, maintaining some cash reserve fund is more important than lowering the monthly payment. If you have significant equity on your home and if you are uncertain about your future income, refinancing to cash out is not a bad option. This is not a long term solution, but it buys you time to correct the problem. Remember, when you need the money most (such as the cases of illness or job loss), it usually is very difficult to borrow money. If you are in this situation, refinance to cash out before the unfortunate event occurs.

When exploring the possibility of refinancing your mortgage, there are many good reasons why you may want to seriously consider.

One reason is to pay-off high interest loans such as auto loans, personal loans, or credit cards that may be hurting your monthly cash flow. Paying off these debts can help shift non-taxable debt into your home at a low interest rate while giving you additional interest write-offs.


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