Home Mortgage Refinancing 101: Get To Know The Basics

In recent years, more and more homeowners have taken advantage of lower interest rates, and have begun lining up to refinance their existing mortgages. According to mortgage industry observers, home mortgage refinancing hit an all-time high in 2003 and 2004. However, while refinancing your mortgage will help you reduce the costs that are generally linked with borrowing money to own a home, it may not be the perfect solution for some people, and the effects may differ with each situation.

Situations That Make People Consider Refinancing Their Mortgage

There are different situations or scenarios that would make people want to consider refinancing their mortgage. There are those who wish to get a fixed-rate mortgage with a lower interest rate, as well as those who have an adjustable rate mortgage (ARM) and want to get a fixed rate. Some opt for refinancing because they have a long-term loan and would like to get a shorter-term loan, which they can easily pay, so that they’ll build equity more quickly. There are also those who want to move from an interest-only mortgage to a loan package that pays down the principal.

What Are The Main Mortgage Refinancing Options?

The four main home mortgage refinancing options include cash out/cash back refinancing, low fixed-rate loan, shorter-term loan and longer-term loan. The cash out option allows homeowners to refinance their mortgage for more than they currently owe, and the difference is then converted into cash for the homeowner to use. The low fixed-rate option is a good choice for those who are not planning to move to another home for the next five years, since they’ll get the security of a fixed rate for their current home’s equity value.

With the shorter-term loan, your monthly payments will be higher, but you’ll pay considerably less interest, and the mortgage will be paid off sooner. For the longer-term loan, your monthly payments will decrease, since you’ll have more time repaying the loan.

What To Do Before Getting Home Mortgage Refinancing

Before you decide to use a home mortgage refinancing option, read the fine print on your current mortgage, and learn whether you will be assessed surcharges or penalties for getting out of the loan early. Also ensure that you determine whether you have a fixed or variable interest rate on your mortgage, as well as know what the terms are. Refinancing your loan should be a good move, if your main goal is to reduce your debt. However, if it is meant to buy something else, then it could set you back considerably, and would instead add to your rising pile of payables.

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