Obtaining a new mortgage to replace the original is called refinancing. Refinancing is generally done to allow a borrower to obtain a lower interest rate or restructure the existing loan term. For borrowers with a perfect credit history, refinancing can be a great way to convert a variable loan rate to a fixed or obtain a lower interest rate.
Borrowers with less than perfect, or even bad credit, or too much debt, refinancing can be risky.
In any economic climate, it can be difficult to make the payments on a home mortgage. Between
possible high interest rates and an unstable economy, making mortgage payments may
become tougher than expected. Should you find yourself in this situation, it might be
time to consider refinancing. With any refinancing, it is important to have a game plan.
What is Refinancing?
Refinancing is the process of obtaining a new mortgage in an effort to reduce monthly payments,
lower your interest rates, or take cash out of your home for large purchases.
What are the Advantages of Refinancing?
One of the main advantages of refinancing regardless of equity is reducing an interest
rate. A lower interest rate can have a profound effect on monthly payments, potentially saving you thousands of
dollars a year. Second, many people refinance in order to obtain money for large purchases or to consolidate debt.
What are the Risks?
One important consideration is closing costs. Before any refinance transaction, it is important to evaluate closing costs and the expected break-even period. We evaluate each homeowners situation and in many cases can offer loans with no closing costs loans.
What Do I Do to Refinance?
The first thing you must do when considering refinancing is to consider exactly how you
will repay the loan. If the home equity line of credit is to be used for home renovations in
order to increase the value of the house, you may consider this increased revenue upon
the sale of the house to be the way in which you will repay the loan. On the other hand,
if the credit is going to be used for something else, like a new car, education, or to pay
down credit card debt, it is best to sit down and put to paper exactly how you will repay the loan.
Reasons for a Borrower to Refinance
Borrowers may consider refinancing for several different reasons, including but not limited to:
A Lower Monthly Payment. To decrease the overall payment and interest rate.
Switching to a Fixed Rate Mortgage to avoid the uncertainty of Adjustable Rate Mortgages.
Avoid Balloon Payments. Balloon programs, like ARMs are a good ideal for lowering initial
monthly payments and rates. However, at the end of the fixed rate term, which is usually 5 or 7 years,
if borrowers still own their property, then the entire mortgage balance would be due. With a
balloon program, borrowers can easily switch over into a new fixed rate or adjustable rate mortgage.
Eliminate Private Mortgage Insurance (PMI). Low or zero down payment options can allow buyers
to purchase a home with less than 20% down. Unfortunately, they usually require private mortgage
insurance. PMI is designed to protect lenders from borrowers with a loan default risk. As the balance
on a home decreases, and the value of the home itself increases, borrowers may be able to cancel
their PMI with a mortgage refinance loan. The lender is required to remove PMI when certain conditions are met.
Cash out a portion of the home’s equity. Generally, many homes will increase in value, and
are therefore a great resource. Increased value gives the opportunity to put the equity to good use.