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.

A refinance is one of the ways a home owner is able to access the equity in their property. They may want to tap into it to get out of financial difficulty, or perhaps make a large purchase, say another property. This means is also used to consolidate all debt, so that the loan applicant only has to pay one lump sum monthly. There are benefits and as with everything else, also pitfalls, so it is important to be aware of this.

To refinance a mortgage can cost as much as 3-6% of the principal loan amount. This can work out to be a very expensive exercise. Exactly the same steps have to be followed to refinance as would have to be taken with a new loan. The property needs an appraisal and title search, applications have to be completed and an application fee is applied to the loan.

Home owners have to take all this into consideration when they are thinking of refinancing a mortgage. They have to ask themselves whether it is going to be of real and positive benefit.

The primary reason of refinancing any mortgage is to obtain a lower interest rate. The general rule of thumb states that if you are able to lower your interest rate by at least 2%, then refinance. Lenders say 1%, but you have to weigh up the benefits knowledgeably.

Saving money by lowering the interest rates you pay is the one true benefit of a refinance. It needs to be able to help you save, by lowering the monthly mortgage payments, and it has to allow you to build equity in the property.

At a 9% interest rate, over a 30 year term, the monthly re-payments on a $100,000 loan will cost you $804.62. If you refinance and reduce the interest rate to 6%, the monthly repayment becomes $599.55, which is a substantial saving. This could make all the difference between losing your property to foreclosure if you can no longer afford it.

Dan Rogers has been in the real estate business for more than 16 years. For more articles like this you should drop by his webpage which covers everything from me trying to explain refinancing a mortgage to mortgage loans first time home buyer no credit check.

Related Blogs