Home Mortgage Refinancing Loans

What are Home Mortgage Refinancing Loans?

A home mortgage refinancing loan does not merely make changes to your existing mortgage. It is the process of applying for a new mortgage that will pay off your current mortgage. The loan procedure starts over from the beginning and may involve a number of preliminary costs as well as filling out a loan application and a credit check.

Why Refinance a Mortgage?

The foremost reason many homeowners refinance is to reduce their interest rate which in turn may reduce their monthly payments and could help pay the loan off earlier.

Refinancing can help a homeowner in several ways:

• Lower monthly mortgage payments
• Shorter mortgage length (such as 15 years instead of 30 years)
• Lower interest rate
• Better rate for adjustable rate mortgages (or ARMs)
• Debt consolidation (lumping high-interest credit cards or loans into new mortgage)

Refinance and Use Your Home Equity

Refinancing to tap into your home equity can give you cash for home improvement projects, debt consolidation, education expenses, or any large purchase.

A cash-out home equity refinance will pay off an existing mortgage using a higher balance loan, so the remainder of the loan can be given to the homeowner in cash. The amount of available cash is determined by the equity built up in the home.

The cash-out refinance loan is different from a home equity loan because it replaces the first mortgage.

Benefits of a Cash-Out Refinance Loan:

• Typically more economical than other forms of financing
• Lower interest rates than credit cards or personal loans
• Mortgage interest is tax deductible

Refinance and Save Money

A home mortgage refinancing loan is also an excellent method of saving money. Lower interest rates are the main reason many people refinance, because they not only save on interest paid but the new loan may also offer lower monthly payments.

Will the lower payment be worth it? A homeowner should consider the costs of the refinance, how long they plan to reside in their home, and how much will be saved on payments each month before taking on a new loan.

Many homeowners choose to shorten their mortgage length during a refinance to pay off their home faster. This may mean higher mortgage payments, but equity will build more quickly. This is a particularly good step for homeowners who plan to sell their home within a few years.

A homeowner can also apply for a longer mortgage term in order to reduce their monthly payments by stretching their mortgage out longer. This may mean more interest paid over the life of the mortgage, but it will provide extra cash each month.

Refinance and Avoid ARM Rate Increases

Adjustable Rate Mortgages (ARMs) feature payments and interest rates that rise and fall with the economic index. If you are expecting your ARM interest rate to increase, you should consider refinancing to a fixed-rate mortgage and steer clear of higher payments.

Better Adjustable Rate for ARMs

A homeowner who plans to move in the near future can refinance their adjustable rate mortgage with a new ARM loan. This will give them a lower interest rate than a fixed rate mortgage, and they can choose how long the rate will remain fixed.

Switch to a Fixed-Rate Mortgage

Adjustable rate mortgages can also be refinanced with a fixed-rate mortgage. If a homeowner plans to stay long-term in their home or wants to lock-in a fixed interest rate, they should consider the switch. This will ensure more predictable payments over the course of the mortgage term.

Cost of Home Mortgage Refinancing Loans

The cost of a home mortgage refinancing loan should be considered when making the decision to engage in the process. A traditional refinance can cost between 3% and 6% of the loan amount, but this varies by lender. While this may cancel out any interest rate savings, you can still make up the difference with lower monthly payments.

Possible costs to consider when refinancing include:

• Application fee
• Title search and title insurance fees
• Home appraisal fee
• Loan origination fee
• Closing costs (fees for closing agents and other legal reviews)
• Points (equal to 1% of the mortgage value; can be thought of as a pre-paid finance charge because more points paid means a lower interest rate)
• Prepayment penalties (for paying off mortgage early, check your original mortgage terms, not common in mortgages under 10 years old)
• Other costs (VA loan guarantee, FHA or private mortgage insurance, etc.)

Getting Your Refinance Started

If a home mortgage refinancing loan is something you want to pursue, you can start the process in the following ways:

• Review what your current mortgage company has to offer
• Check with your bank or lender to see what programs are available
• Check with competing banks or lenders in your local area
• Surf the internet for lenders offering Online Mortgages