There are a variety of reasons why someone would want to refinance their mortgage. To understand the benefits, it helps to understand exactly what refinancing a mortgage involves. When you refinance a mortgage, you are basically buying your home again. The benefit, of course, is that you are buying the home from yourself. The asking price? The amount left on the loan. So, if you have lived in your home for several years, and have a good deal of equity in your home, you can refinance the balance of your mortgage. Typically, people refinance when mortgage rates have lowered. The benefit then, is that by financing less money, and financing it at a lower rate, you can either shorten the term of your mortgage, or you can lower your monthly mortgage payment.



There are other reasons that people refinance their mortgage as well. If you need a substantial amount of money, refinancing is a good way to come up with the cash. In what is known as a cash out refinance, it is possible to refinance your home, using the appraised value of your home as the loan amount (or a percentage of the value, typically around 80%). The difference between the amount of loan that you qualify for, and the amount you owe on the home, is paid as cash. This is an excellent way to come up with money for college, home repairs, or other big ticket items. Because homes often appreciate in value after purchase, it is possible to borrow a substantial amount of money if you have lived in your home for five or more years. Of course, the more equity that you have in your home, the more cash you can receive. It is important to remember, however, that you will be making mortgage payments on this new loan amount, whatever the amount may be.

Some people choose to refinance a mortgage in order to consolidate their debts. If you have a substantial amount of credit card debt or medical expenses, refinancing can be an excellent way to pay these debts off over an extended period of time. The process is similar to a cash out refinance, however, you will pay off your creditors instead of having extra cash in your account. If you choose this type of refinance, it is important to remember that you are not debt-free. The bills are rolled into your mortgage, so you will be paying the credit card or other debt off over a period of 30 years, or whatever your mortgage terms are. If you go back to spending the way you were previously when you acquired this debt, then you will end up in a vicious circle. It only makes sense to consolidate your bills into a mortgage loan if you are serious about reducing spending and preventing yourself from getting into the same financial situation again.

Drawbacks of Refinancing a Mortgage

Refinancing a mortgage does not always make sense. While it can be an excellent way to save money on your mortgage, or reduce your monthly expenses, for some people it does not make sense. Typically people look at refinancing their mortgage when interest rates drop one to two percent. This is not, however, the only indicator that refinancing is a good choice.

There are costs associated with refinancing. As stated earlier, refinancing is essentially re-buying your home. This means that you will once again be subject to closing costs. Your home will be appraised, the title will be checked, and the bank will, of course, have their fees. If you plan on staying in your home for at least five more years after the refinance, then it makes sense to consider refinancing your mortgage when rates drop a percent or two. If you believe that you will move before five years, you will probably not save any money by refinancing.

One way to save money on refinancing expenses is to stay with the same lender that currently holds your mortgage. When you stay with the same lender, you may be able to negotiate reduced closing costs, or a reduced mortgage rate without paying points. If you are interested in exploring a mortgage refinance, and you have been basically happy with your lender over the period of time you have had your mortgage, it makes sense to start there in the search for refinancing options. If you find lower interest rates or low closing cost loans at another institution, first ask your current company if they can match these deals. The mortgage market is very competitive, and, if you have a history of prompt payments, and have a substantial amount of equity in your home, it is very likely that the mortgage company that holds your loan will be willing to work with you.