Basic of Home Mortgage Refinancing

There are several different reasons why home owners consider refinancing, but with lenders following tighter lending practices it is no longer as easy to do. The Federal Reserve has issued guidelines advising that borrowers should no longer assume that refinancing is an option. However it remains a popular choice for many, but careful consideration should be given to ones reasons for arranging refinancing and if it is a cost effective move.

Refinancing involves paying off the existing mortgage with a new mortgage loan. Reasons for doing so can be to change to a lower interest rate and thus reduce the interest paid on the instalments and make a long term saving. People who have seen improvements in their credit score since originally taking their mortgage may now be eligible for preferential interest rates which they were previously denied.

Some choose to extend the term of their current mortgage to reduce the monthly instalments, which although reducing payments will cost more over the term of the loan in increased interest payments. Some borrowers are refinancing to reduce the term of the loan and increase their monthly payment, thus paying more on a monthly basis but less interest overall. This is not necessarily cost effective if over paying the mortgage is a viable option, as there would be no refinancing costs involved with the latter.

Many people refinance their mortgages in order to release cash equity, using it for home improvements, debt consolidation, and vacations, amongst other things. This reduces the established equity in the property, and is potentially risky. This has certainly been illustrated by those who took the equity and then saw their properties devalued to beneath the level of the mortgage.

Others choose to refinance in order to make a change to the type of mortgage they hold, preferring to switch to a fixed rate mortgage than remain hostage to interest rate changes which may affect an adjustable rate mortgage.

Those who decide to remortgage may do so through their original lender, or choose a new one, though the costs will probably be higher with a new lender. Before making the decision to refinance borrowers should check to ensure they will not be liable for any penalty clauses which would negate the benefits of refinancing. The cost of refinancing can be as high as those associated with obtaining a first mortgage, and can include an application fee, origination fee, appraisal fee, inspection fee, closing costs and legal fees. It is thus important to calculate if any overall saving is worth the additional expense.

Interestingly more of the borrowers electing to refinance are moving away from taking equity out of their homes, and are refinancing for lower interest rates. At the same time they are paying extra towards the principal to thus increase their equity stake in the property. This is without doubt the most sensible move to make when it comes to refinancing, and combines lowering the principal amount owed with securing a better mortgage interest rate for overall savings.