Should You Go for Mortgage Refinancing
February 1st, 2012 Filed under: Foreclosure Refinance — Foreclosure AuthorWith interest rates constantly dropping, the need for many people to save money, refinancing a mortgage loan has become increasingly popular. Actually, refinancing doesn’t make sense for each homeowner in each condition. However, it could be a smart move for you depending on what you wish to accomplish by refinancing, the amount of mortgage you owe and how long you plan on staying in your home.
Have you ever thought about refinancing your mortgage as a way to achieve your financial goals more quickly and effectively? Or are you still unfamiliar with the refinancing service? Whether or not you need to have your mortgage loan refinance, it is crucial to understand how mortgage refinancing works.
What does mortgage refinancing mean?
Mortgage refinancing, also known as remortgage, is the process of repaying your current or existing mortgage with a new loan using the same property as security. In general, the process of refinancing doesn’t involve moving home or taking out a second mortgage. It is in fact the transfer of a mortgage from one lender to another. Often, the purpose of switching is to secure more favorable terms such as a lower interest rate.
There are basically two types of mortgage refinancing options: non cash-out refinancing (that are also traditional refinancing) and cash-out refinancing. Each of them could help you to achieve a different financial goal.
No Cash-Out Refinancing
In this form, the refinanced loan quantity is less than the mortgage money owed currently. To be precise, traditional refinancing allows homeowners to have a loan of up to 95% of the appraised price of their home. This could definitely be beneficial to applicants, as this type of refinancing significantly reduces the monthly expenses and other related final costs and financing costs.
Cash-Out Refinancing
Instead, cash-out refinancing enables homeowners to have a loan of more than the quantity owed on the currently mortgage. It is usually used to free up some of the extra money that a homeowner has built up in home equity. Homeowners borrow the equity in their home to pay for expenses like home improvements, education or repaying other types of debt. However, there is usually a limit on the equity that can be borrowed of no more than 75% to 80% of the raised price of the home.
When is a good time to refinance?
As we know, refinancing is mainly to lower monthly payments and guard against risk. If your interest rate unluckily has declined since the time you obtained your mortgage, it could be a good opportunity to secure a lower interest rate by refinancing. If your mortgage payments are too large and you have difficulty in making payments, you can also refinance the term of your loan. This means you can extend the term of your mortgage to make your monthly payments a bit smaller.
Another good reason to refinance is to change your adjustable-rate mortgage to a fixed-rate one. For instance, in case the interest rates are currently very low and you are on an adjustable-rate mortgage, the probability that your rates will increase is high in the future. Refinancing to a fixed rate enables you to lock yourself in a lower interest rate, even though interest rates increase.
Is there anything you should consider when refinancing your mortgage?
Of course, yes! While refinancing could be a great opportunity to obtain a better deal on your mortgage, it is important to figure out whether it’s really going to be beneficial to you. Here are several things to consider when refinancing.
1. Are you really obtaining a better deal? Many mortgage companies will attract you by low payments. When you dig deeper, however, you will find what they do is just to extend your loan and you are thus paying more in interest throughout the new, longer loan. Also, be sure not to be tricked by being offered a low rate with lots of refinancing fees. Remember to take advantage of the comparison tools and calculators available online.
2. Are you eligible for getting better loan terms with a mortgage refinancing? Though mortgage refinancing seems good, not every homeowner can be eligible. Serious credit problems, large amounts of debt, high loan-to-value (LTV) ratio, late mortgage payments or an unverifiable income can prevent applicants from getting loans with better terms and lower interest rates.
PS: LTV ratio is to express the amount of a first mortgage lien in the form of a percentage of the total appraised value of real property. For example, if a borrower borrows $80,000 to purchase a house worth $100,000, the LTV ratio is $80,000/$100,000 or 80%.
3. Mortgage refinancing would incur related fees! There are costs associated with mortgage refinancing. The costs vary from lender to lender. So, make sure the amount saved in interest rate is larger relative to total transaction fees involved.
