Mortgage refinancing is usually the process whereby a new loan is created on a property already having an existing loan. Normally, when the owner of the property refinances, the new lender pays off the existing loan and a new loan is then created between the lender and the borrower. Many people choose to refinance a mortgage so as to obtain a lower interest rate, reduce their monthly repayment or take out cash by accessing the built-up equity.
When the borrower intends to reduce the interest rate as well as the term of the existing loan, he will create a new loan with a term and interest rate that is lower than the initial loan amount without having access to the home's equity. More than possible, the amount of the new loan might not be considerably higher than the initial loan amount. The lender may decide to do this since by getting a lower interest rate, this may lower his monthly payment while a shorter term of lease can decrease the amount of cash payable to the lender in form of interest over the agreed period of the loan.
Mortgage refinancing that involves the property equity which is the positive difference between the amount owed on the property and the current value of the property is known as "Cash-Out Refinance." Cash out refinancing can provide funds that may be used to pay off high credit cards interests as well as other consumer debts. Making a comparison of the interest rates may not be sufficient to determine your savings and it may be essential to also consider the refinancing costs as well as the duration you will be required to pay your new mortgage.
Based on the on the home equity amount you have, it is possible for you to refinance for an amount higher than that required to pay off the current mortgage. Typically, lenders tend to restrict cash out refinancing to not more than 80% of the total current value of the home. However, if you are thinking about cash out refinancing, keep in mind that you are increasing you're the risk of foreclosure as well as mortgage debt and if the value of the home decreases, you might owe more than the value of your home.
On the basis of rate as well as term refinance, the borrower must calculate what will be his monthly savings in relation to the new loan and compare it with the loan. The borrower also needs to consider the total cost of acquiring the loan as common charges include pre-paid interest, lender origination fees, tax, title, appraisal, credit check and also escrow fees. The borrower also needs to determine the period of time he intends to live in his current home and as soon as he is equipped with all this information, then he is in a position to calculate the duration he must remain the owner of the property before the monthly savings justify the up-front costs of the loan.
Therefore, before undertaking any mortgage refinancing, it is important to understand how long you intend to stay in your existing home as this will assist your lender to recommend you a mortgage product that is suitable for your refinancing.
