Home Mortgage Refinancing


What is mortgage refinancing?
There are pros ...
... and there are cons.


What is mortgage refinancing?
In brief, home mortgage refinancing consists of paying off an existing mortgage and taking a new one out. This includes an application for a new loan with the intention to substitute already existing one guaranteed with the same assets. Most commonly you will refinance a home mortgage.


Pros
Refinancing could be taken for a variety of beneficial reasons:
- interest costs could be reduced by replacing the initial loan with a refinance mortgage loan having a lower rate;
- by taking a new loan with a longer term, the periodic payment obligations could be reduced;
- the risk could be reduced at some point by replacing a loan with variable rate with a loan having a fixed-rate;
- refinancing could be done also in order to convert available equity in a property into easy cash, available for other expenses or purposes.

Most likely, a mortgage re-financing could lower the owed monthly payments on home mortgage loans. This is achieved either by changing the interest to a lower rate, or by prolonging the term of a loan in order to spread the payments over an extended time period. The money that are saved this way eventually could be used to reduce the principal of your loan, thus lowering the payments even further.

Another use of refinancing mortgage is to lower the risk related to an existing loan. Adjustable-rate loans have interest rates that move up and down depending on a variety of prime rates. By turning an adjustable-rate mortgage ("Balloon") into a fixed-rate one, the risk of a significant increment of the interest rates is eliminated and a stable refinanced mortgage rate over the time is achieved.

A debt with a high interest rate, for example credit card debt, could be re-financed with lower-interest loan, for example a home mortgage.

Another possibility is to put in use your improved credit rating. If you have taken a "bad" loan once due to the lack of a good credit history, you may attempt bad credit mortgage refinancing in case your rating has improved since the time you've got the first loan. Most probably you will easily get a lower interest rate and better terms.

And yet another possibility is to refinance a non-tax deductable debt, for example car loan debt, with a loan that is tax-deductable such as home mortgage debt.


Cons
- Some types of mortgage loans have penalty clauses concerning an early payment of the loan (partially or in its entirety).
- Typically there are transaction and closing fees triggered when you re-finance a loan (It may be good if you search for and choose a no closing cost refinance).
- Some refinanced loans may have lower payments initially, but over the life of the loan it's possible to result in a greater cost of the totally paid interests.
- Sometimes the new loan could expose you to a higher risk than the initial one.

So, in some cases, the above fees and risks may stultify the savings generated in result of refinancing a mortgage loan. In general, it should be considered if it will save a substantial amount of money (in the long or short term). Another possible application could be if there is a need to prolong the loan term for some reason.

Either way, have in mind that calculation of the initial, ongoing, and variable costs of a potential home mortgage refinancing is really crucial for taking a decision on whether or not to embark on this "boat".

It's a good idea to use an online mortgage calculator for an initial decision. You could find one here.

If you're interested in further information on this topic you may check our Mortgage Links section or go to our Home Mortgage Refinancing Site.


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