Home Mortgage Refinance – The Basics and What You Need to Know

Refinancing a home mortgage simply means that your existing mortgage will be paid off using a new loan (obtained through refinancing), with the chance to obtain a lower interest rate, better terms and conditions, shorter length of the mortgage, switch from a ARP loan into a stable fixed rate loan, or tap into your homes equity and do a cash out refinance.

There are advantages and disadvantages to these refinancing options. Also, refinancing a home mortgage generally costs 4% of the home loans principal, just like when you took out the original mortgage, and also requires an appraisal, title search and application fees, as well as other costs. With this in mind it is very important for a homeowner to consider the costs and determine from there if refinancing their home mortgage will be a true financial benefit.

Obtaining a Lower Interest Rate.

The most common homeowners refinance though is to reduce their interest rate. Typically, a rule of thumb is that refinancing into a loan with a reduced interest rate by 2% or more will be financially beneficial. However today, many mortgage lenders and banks claim that even a savings of 1% can be helpful. By reducing your interest rate, your are not only going to save more money but also build equity in your home at a faster rate with each payment. As an example, say your 30 year fixed rate mortgage has an interest rate of 9% which on a $150,000 is a $1206.93 per month payment. If you can reduce that interest rate to say 4.5%, which is currently available all over the country, that payment would be around $400 per month cheaper for the homeowner every single month.

Shortening the Length of the Loan.

When interest rates drastically fall, as they recently have, homeowners also have a great chance to reduce the length of their home loan by years and still pay around the same amount every month. If you have a $100,000 home, then a refinance from say 9% into a 5.5% loan and cutting the loan into half to 15 years, would only increase the mortgage payment by $14 or so, resulting in huge savings for the homeowner.

Switching from an Adjustable rate mortgage and into a Fixed rate mortgage, or vice versa.

Usually ARM loans start put by offering amazing low interest rates compared to a fixed rate mortgage. However what often happens is that is periodic rate increases that end up higher than the fixed rate you would have been able to acquire. When this happens, switching into a fixed rate mortgage will result in lower mortgage interest rates, and financially stability.

There can also be benefits into refinancing of a fixed rate mortgage and into an ARM. When interest rates are falling, like they have been, an ARM interest rate can will usually go down with the national average rate, which results in lower mortgage payments, which also means their will not be a need to refinance should interest rates keep dropping as your mortgage will automatically adjust. Also, homeowners who do not plan on living in their home for more than a few more years can choose to refinance into an ARM loan and not worry about rates increasing in the future as they will be out of that home by then.

Debt Consolidation and Cash Out Home Mortgage Refinancing

While all of the reasons to refinance previously talked about are all legitimate good reasons to do so, refinancing a mortgage can be a quick way to a deep, seemingly endless, debt. Keep this in mind when considering refinancing your home in order to use the equity or for debt consolidation. A lot of homeowners will use their homes equity to cover large expenses such as a home repair or remodel, or tuition. These homeowners will reason in their minds that remodeling a home adds value to it, or the interest paid on a cash out refinance would still be lower than a typical loan. Other homeowners justify the refinance for cash by saying the new, higher interest rate, is tax deductible. While this may sometimes be true, it is rarely a smart decision to increase the length of your homes mortgage, just like spending $1 extra dollar to save $.29cents in tax savings is not smart.

There are plenty of homeowners who refinance in order to consolidate their debts. From quick glance, replacing high interest debt burdens with a lower interest rate mortgage looks like a great idea. Refinancing a mortgage for cash from the homes equity is not a magic bullet for financial freedom. Typically, people who have gotten themselves into financial trouble will do so again with time. This multiplies the true losses as the costs and fees related to refinancing, losing equity, and more payment years take their toll. This creates a never ending cycle of debts. So refinance with a clear cut financial plan in mind.

Should you even refinance your home loan?

A home mortgage refinance can be a great financial move if used to shorten your loan length, reduce your payments, or build equity faster. It also is a powerful financial option to get up your debts under control. Make sure to carefully evaluate your financial situation prior to refinancing, to know if it is the right choice.