Refinancing Mortgage Home Loan explained- What is Mortgage Refinance?

What is Home Mortgage Refinancing? Why does mortgage refinance work?
Mortgage Refinance is an option for you if you already have purchased a home and have taken a home loan or mortgage for it. In this case Refinance means taking a new home loan or a second mortgage in order to pay off your old mortgage. If the current mortgage refinance rates are attractive, mortgage refinancing can result into monthly savings for you. Below is a link provided to a Refinance Mortgage Calculator which can be used to calculate how much will you gain by refinancing your home loan. Also in the post you will find simple but effective tips for how to go about refinancing your mortgage. Here are the four possible situations in which refinancing mortage can turn out to be profitable.

  1. Refinancing Mortgage with lower mortgage rates: If the mortgage interest rates drop, it maybe cheaper for you to take a new home loan and pay off your original mortgage.
  2. Refinancing Mortgage with a longer term: If the monthly mortgage payment is turning out to be too much of a burden for you, it may make sense to take a new home loan with a longer term and convert your short term mortgage into long term mortgage thus resulting in lower monthly payments.
  3. Cash Out Mortgage Refinancing: This type of mortgage refinance simply means you take a new home loan which is larger than your current mortgage liability, and thus even after paying off your current mortgage you have some extra cash remaining with you which can be used for some other purpose. This can especially be an alternative in emergency situations where you need cash, e.g. you lose your job, etc.
  4. ARM (Adjustable Rate Mortgage) versus Fixed Rate Mortgage: Adjustable rate mortgages are those where the interest rate may vary according to market conditions. Fixed rate mortgages are those which have a constant rate of interest throughout the term. Changing terms of your mortgage for e.g. changing an ARM to Fixed Rate Mortgage may also be one of the things you can do while considering the refinancing option for your home loan.
Refinancing Mortgage: Charges and fees involved- Refinance Mortgage Calculator
Before considering the option of mortgage refinance one needs to understand that it refinancing is never free. There are several charges involved when you try to refinance your mortgage. It is important to consider all these charges before you finalise your decision to refinance your home loan and do not make the mistake of simply comparing mortgage rates. You can use this Refinance Mortgage Calculator on in order to calculate how much money will you actually save by refinancing your home loan and also to compare and choose the best refinancing option. Also on the above link you will find links to find the Refinance Mortgage rates in your local area for various home loan options like 30 year fixed rate mortgage, 40 year fixed rate mortgage, 1 year ARM, etc.

The concept of a Mortgage Point or Mortgage Points
An important parameter to be considered while refinancing mortages is the concept of a Mortgage Point also sometimes called as a discount point. Banks usually charge 'advance' or 'pre-paid' interest from the borrower. One mortgage point equals 1% of the Loan amount. This upfront amount or Mortage points can be paid to the lender in order to reduce the interest rate and thus the monthly mortgage payment. Typically paying 1 Mortgage point reduces the interest rate by 0.125%. What refinancing options is best for you, how much mortgage points works best all depends on the current amount of spare cash you have and how much you are willing to pay upfront money in order to reduce your monthly mortgage payment.

Simple things to keep in mind before you take your decision to refinance mortgage.
  1. First fix a general idea of what you would like to do gain by refinancing your mortgage. Ofcourse most of us consider refinancing because they want to take the benefit of lowered interest rates, but do you also want to increase your mortgage term, say 15 year fixed mortgage to 30 year fixed mortgage in order to reduce your monthly mortgage payment burden? Narrow down your options to less than two or three.
  2. How much mortgage points or upfront payment can you actually afford in order to reduce your monthly mortgage payment? This option depends on how much cash you have. Or are you considering mortgage refinancing to get extra cash to settle other dues, etc.? In case you have other high interest rate debts like credit card debts, you may want to consider the option of cash out refinancing, i.e. getting a second home loan greater than your current mortgage liability in order to pay off other high APR debts.
  3. Call/Contact at least four to five lenders or banks (the more the better) and compare their mortgage rates and refinancing charges and fees using the above mortgage refinance calculator link. In this manner you can choose the best deal available to you and thus benefit the most from your refinancing idea.

Mar 26, 2009

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