Details About The Mortgage Refinance Process
Mortgage Refinancing is the process by which homeowners change the terms of their current mortgage for a small fee
. Refinancing allows homeowners with a high fixed rate mortgage to take advantage of lower interest rates, and those with adjustable rate mortgages to take advantage of the stability of a fixed rate. Refinancing also enables homeowners with two mortgages to consolidate them into one. It makes it possible for mortgage holders with short-term policies to lengthen the term and lower monthly payments, or holders with long-term policies may refinance to shorten the loan term in order to pay off the home and build equity faster. Some refinance options even allow a homeowner to get cash back for personal use, home improvements, or to pay off other debt.
Because there are so many options to consider when refinancing a home, just as with signing a first mortgage, it is important for potential refinancers to explore every possibility and read all the fine print to make sure that refinancing is the best decision.
Generally, the rule of thumb is that refinancing is only worth the trouble if it changes your current interest rate by two points. However, what is most important is at least breaking even after all the costs and fees associated with the refinance process. In short, a homeowner should be sure they are planning to stay in the home long enough to reap the benefits.
While there are many options for homeowners looking to refinance, all mortgage refinancing options belong to one of four categories: cash-back refinancing, low-fixed rate refinancing, longer-term loan, and shorter-term loan.
Cash-back Refinancing
Cash-back or cash-out refinancing is a plan in which a homeowner renews their mortgage for an amount greater than what they owe at the time of refinancing. That equity is returned to the homeowner in the form of cash, and can be used however the he or she deems necessary.
This can be a smart move if the homeowner is using the money to increase the value of the home or to pay off and consolidate debt at a low and locked interest rate. However, if used for consumer purchases, it can place a financial strain on homeowners down the road.
Low Fixed-Rate Refinancing
For homeowners with high fixed rates, or with ARMs at an already low rate that want the safety of a fixed rate, a low fixed-rate refinance is an option to consider. This allows homeowners to take advantage of the markets presently low rates and lock on to them before they rise.
Again, it is important to make sure the percentage difference will, over the time the homeowner plans to stay in the home, at least equal the closing costs and fees associated with the refinancing agreement.
If you purchased your home at a time when rates were high and have been shaking your head as you watch rates plummet, low-fixed rate refinancing may be a good option as long as you plan on keeping the home for at least five years.
Longer-Term Loan
If a homeowners current monthly payments are placing a strain on their financial situation, refinancing to a longer-term loan might be a viable option. While the owner will incur the costs and fees associated with refinancing and end up paying more in interest over the life of the loan, monthly payments will be reduced.
A longer-term loan is a good choice for a homeowner who already has a considerable amount of equity built up in the home, but wants to free up cash flow for other uses.
Shorter-Term Loan
For homeowners who wish to build the equity on their homes more quickly and own it outright much sooner, a shorter-term loan is a good choice. While monthly payments will be increased, more money per month will be directed toward paying down the principal. This also allows a homeowner to receive larger tax deductions on interest.
If a homeowner moving from a long-term to a shorter-term loan has enough equity in the home, they may be able to make the move without a substantial increase in their monthly payment.
Choosing the Best Option
When shopping for a refinancing package, homeowners should look beyond the annual percentage rate and try to see the bigger picture.
For example, on a 30-year $125,000 mortgage at a fixed 7% interest rate, a homeowner looking to drop down to a 5% rate over 30 years goes from payments of $832 to $671 a difference of $161. If the cost of refinancing was $2000 (it can often be much more), the owner will not break even until 13 months later. If this owner hopes to move during this time period, refinancing will end up costing them money.
Not only are there standard costs associated with the refinance itself, but some mortgage agreements will charge penalties or fees for retracting from the agreement prematurely. Potential refinancers should be familiar with their current mortgages, as well as shop around for the refinance option that will benefit them the most. Be prepared to cover the costs at the onset of your search.
by: mor123
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