There are certain circumstances that come into play in terms of mortgage refinancing. A cash strapped home owner may benefit from a refinance, if the interest rates they are paying are making the property unaffordable. In some circumstances a refinance is a good thing, but in others it may not be so good, it just depends in the financial position of the individual.
It basically entails paying off the present underlying loan and replacing it with another, usually more affordable loan. It provides the home owner with the opportunity to shorten the term of the loan, obtain a lower interest rate, or convert from an ARM to a fixed mortgage rate. ARM’s are adjustable rate mortgages and together with Sub-prime loans have virtually alone been responsible for the dreadful foreclosure crisis being experienced in the US today.
It is also a way to tap into any existing equity in the property in the case of a large financial problem or purchase, and it is also used as a way to consolidate debt or finances. There are benefits to this as well as pitfalls, and any home owner considering a mortgage refinance should be aware of both these.
It may cost as much as 3-6% to refinance a mortgage. This is 3-6% of the principal loan! On a large amount, this is a lot of money so it can be an expensive exercise. When you take out a new loan or refinance, the same steps must be followed, an application has to be made, and application fees apply, an appraisal of the property must be made as well as a title search.
All of these factors must be considered before applying to refinance your mortgage. You need to have very clear reasons why you are doing this. You also have to know if refinancing will provide tangible benefits.
The chief reason why any home owner seeks to refinance their mortgage is to lower the interest rates they pay. In general terms if a refinance can lower the interest rate being paid by 2%, this is a good deal. Banks say 1%, but this leaves a very fine line in terms of real savings. Being knowledgeable as to why you want a refinance is imperative.
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:
This simple example illustrates how this may apply: You have a home loan for $100,000 and at 9% interest over a 30 year terms you pay, $804.62 per month. Reduce your interest rate by 3% to 6% and your monthly payments will be, $599.55, a substantial saving!
The author has been in the real estate field for more than 14 years. For more articles like this you should drop by his webpage which explains everything from me trying to explain refinancing a mortgage to mortgage loans first time home buyer no credit check.