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Refinancing is the process of paying off an existing loan with the proceeds from a new loan, and using the same property as collateral.
Mortgage refinancing can be an intelligent financial move for borrowers. However, it may not be the best strategy for those unsure of what it is and how it works. Mortgage rates are tied to mortgage-backed securities and are not set by the Fed. What is needed to actually save money is a low interest rate; if the interest rate on the new mortgage is less than the old, the loan costs less and you save money.
Refinancing is a means of replacing high-interest debt with a loan that has a lower interest rate. But it can also be done in order to switch from a fixed to variable rate, or vice versa, or to eliminate a balloon payment. Refinance throws open numerous alternatives to borrowers, on whom other conventional lenders may have turned their back. Refinancing conveys other less tangible advantages, too. If you are in peril of missing a monthly payment for the reason that your finances are tight, refinancing can decrease payments and provide you some breathing room each month.
Refinancing is generally handled by direct lenders (banks, credit unions and finance companies) or mortgage brokers. These lenders supply the money. A good refinancing will pay dividends for years to come. Refinancing is basically like applying for a mortgage all over again, just as you did when you bought your home. The same types of lenders that you may have considered for a mortgage are the ones you will be looking to now for refinancing purposes.
Refinancing is actually applying for a new mortgage, so you may have to pay many of the same fees associated with the original purchase of your home, including an application fee, title search and title insurance fees, a loan origination fee and legal service fees. Moreover, the contract for your existing mortgage may provide for a prepayment penalty. In most cases, you can apply anytime (during your loan) for refinancing.
Mortgage modification and refinancing are longer term solutions that are best suited for situations like the loss of one’s job, divorce, or long term disability. Basically any of these options are good for any situation where the homeowner’s ability to make money will be compromised for a long time.
Refinancing usually makes sense only when there has been a drop in interest rates and you want to lock in a new mortgage at a lower rate for a longer term than your existing mortgage, or when you need to access some of your equity. It can also benefit those who want to refinance their mortgages for a longer term to lower their monthly payments. Refinancing may prove unattractive for homeowners who have mortgage insurance in part because Fannie Mae and Freddie Mac are set to introduce new risk-based pricing schedules that will increase the cost for most borrowers who obtain a conforming loan. Again, those extra fees may wipe out the benefits of a lower interest rate.
There are lots of wild claims about the benefits of refinancing, and sadly enough there are some shady marketing tactics used in the Mortgage Loan business; refinancing is no different.
Interest rates have remained at low levels for the last couple of years and the refinance industry has been booming. Many people have taken advantage of these rates to lower monthly housing payments, pay off credit card debt faster, and in general pay less for the privilege of borrowing money. Taking out a new fixed interest mortgage could be a very smart financial move, as rates have nowhere to go but up in the future.
You need to figure out if mortgage refinancing will prove to be worth the time and money that needs to be invested. Interest rates may increase in the future; if you hve adjustible rate mortgage, this can make the interest payment a burden for you.
Consider carefully the costs and risks before making the decision to refinance your mortgage.