Mortgage Refinancing, What Exactly Does This Mean?
Mortgage refinancing plays a very important role for many home owners, particularly if they are struggling financially. It is a better alternative than falling prey to foreclosure, and if better interest rates can be negotiated, the home owner may find themselves in much better circumstance. Interests rates which increase as inflation increases are not a good option for most home owners.
A refinance mean that the underlying loan is paid off before reaching term and a new loan is negotiated. There are many reasons for this, to decrease the monthly repayments, shorten the loan term, or convert from and adjustable mortgage rate to a fixed rate and in the process lower the interest on the loan. Sub-prime loans and ARM’s have caused havoc in the housing market in recent years, due to bad landing practices. Home owners with these have lost so much property to foreclosure and banks have lost a huge amount also.
A refinance is one of the ways a home owner is able to access the equity in their property. They may want to tap into it to get out of financial difficulty, or perhaps make a large purchase, say another property. This means is also used to consolidate all debt, so that the loan applicant only has to pay one lump sum monthly. There are benefits and as with everything else, also pitfalls, so it is important to be aware of this.
It can cost as much as 3-6% of the principal amount of the loan to refinance and this is an expensive consideration. Basically the methodology for a loan refinance is the same as taking out an original loan and all the same steps have to be taken. The property has to be appraised, a title search conducted, and application fees applied.
It is for this reason that any home owner considering refinancing their mortgage, has to determine the reason why, and whether it will be of any real benefit.
The primary reason of refinancing any mortgage is to obtain a lower interest rate. The general rule of thumb states that if you are able to lower your interest rate by at least 2%, then refinance. Lenders say 1%, but you have to weigh up the benefits knowledgeably.
The premise behind lower interest rates is saving money! Your monthly payments should decrease quite substantially while still allowing you to build equity in the property. We illustrate how this can be done in this simple example:
A $100,000 home loan with a 9% interest rate and a 30 year term, realizes a monthly re-payment of $804.62, the same loan, and loan term with a 6% interest rate costs $599.55. The difference in the amount of these two re-payments could mean the difference between saving a home and going into foreclosure if hard times come upon the home owner.
The author has been in the real estate industry for more than 14 years. For more articles like this you should drop by his website which covers everything from me trying to explain refinancing a mortgage to mortgage loans first time home buyer no credit check.
