Refinance Home Mortgage Loans

People choose to refinance home mortgage loans to lower monthly payments, lock in better interest rates, or draw cash out of their equity to finance remodeling projects, pay for college, or consolidate higher interest loans. Let's face it: everyone wants to save money. Refinancing can be a good tool to do just that, but it can cost a borrower more money than he or she was originally paying. There is no blanket answer. Whether or not to restructure financing depends on the situation of the borrower. For some, it is the answer to an ever-increasing financial burden. For others, refinancing could be detrimental, costing more than expected and hurting a valued credit rating as well. Before deciding to refinance home mortgage loans, homeowners should evaluate their goals and plans to see if refinancing is a good strategy and which program works best for them.

Simply put, refinancing uses one loan secured against a property or asset to replace another loan against the same secured item. What have changed are the conditions of the money borrowed and often the value of the secured asset. Probably the factor that has fluctuated most is the interest rate. Rates rise and fall daily, riding the waves of the market and economy at any given period. Since the time a homeowner first bought his or her house, the primary interest rates probably have changed considerably. Over the duration of 10, 20 or 30 years, this change can mean thousands of dollars for the person originally signed at a higher fixed rate. Others who have adjustable rate mortgages (ARMs) may desire more steady monthly payments over those that rise and fall with the interest rates each month. These individuals may refinance home mortgage loans at a time when interest levels are low. On the other hand, if a homeowner doesn't plan to stay in a house more than five years, switching from a fixed rate to an adjustable rate might save money since ARMS tend to pace lower than the current fixed rate at the time. If the rates do go up, he only has to pay them until he sells.

Homeowners may also save money by changing the term of their mortgage. If monthly payments are difficult to meet, homeowners may refinance home mortgage loans to lengthen the repayment schedule, which spreads the amount owed over a longer period of time, making monthly payments much smaller. However, unless the interest rate has lowered significantly, this option usually means that the individual will end up paying more in the long term. Many homeowners opt to shorten the repayment term. If the interest rate has dropped and monthly payments consistent, borrowers can pay off their mortgage in a shorter time, saving money in interest and building up equity faster. By refinancing, individuals may also eliminate primary mortgage insurance (PMI) that would have been required for them to purchase if they were unable to make a 20% down payment when the loan was signed. Even if the borrower hasn't had the opportunity to pay 20% of the principle, the value of the home may have increased enough to cover the 20% required, eliminating the need for the extra insurance payments.

Another reason people decided to refinance home mortgage loans is to consolidate debts. Many homeowners restructure debt by taking out a second mortgage using the equity in their houses as security. These home equity loans usually have lower interest rates than credit cards or automobile financing, so they are very appealing to people trying to get lower financial problems. But home equity loans can actually become an extra burden. Now, borrowers have two monthly payments to make, each carrying the risk of losing a house if either payments aren't made. An alternative option is called cash-out refinancing and allows the mortgage to be restructured at a higher amount. The homeowner gets the cash he or she needs and only has the pressure of one loan and one monthly payment. Interest rates are similar to those of a home equity loan and repayment can be scheduled over an extended period of time. However, borrowers should be careful not to borrow more than they need. The debt has just been shifted, not eliminated. "Be no thou one of them that strikes hands, or of them that are sureties for debts." (Proverbs 22:6).

For individuals wanting to refinance home mortgage loans, the options available are almost endless. Borrowers who find the lower rates associates with adjustable-rate mortgages, but fear the fluctuation of interest rates can apply for mortgages with rate caps that limit the amount of interest charged or a payment cap, controlling the amount of monthly payments. However, with such cap clauses, interest held back will be carried over to the next adjustment period. Interest only mortgages allow borrowers to only pay interest on a house for limited time. Initial payments are very low, but rise after the initial period has expired. These loans often include prepayment penalties and other fees. Homeowners can also choose lenders who have been approved by the Federal Housing Administration (FHA), which provides insurance for people who refinance home mortgage loans that meets a strict set of standards. First time home buyers who aren't able to make the 20% down payment or individuals who have less than perfect credit can benefit from using FHA lenders.

So, is it worth it? Although refinancing can be beneficial for many homeowners, it does come with some risk. Closing costs, lawyer's charges, a laundry list of miscellaneous fees can easily surmount the money saved through lower interest rates or shorter terms. Some lenders offer no document or no fees closing options for borrowers with excellent credit histories, but these options aren't available to everyone who wants to refinance. Borrowers who refinance home mortgage loans must carefully consider the fine print of all documents to make sure they aren't taking on greater liability that would put their home at risk of foreclosure or dip into their equity too much. Consider personal goals and long-term plans before making the right decision.



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