A mortgage refinance is when a consumer or business refinances an existing
mortgage loan to either obtain a lower interest rate, different payment terms,
to take equity out of the property, or to extend the length of the loan. During
the last decade home refinancing has been an extremely common method for
consumers to change their monthly payment obligations by taking advantage of
historically low costs of borrowing money. This has led to major growth in the
mortgage loan origination industry as banks and non-financial lenders have
competed to underwrite the greatest share of mortgages.
By far the most common reason for a consumer to consider refinancing is to
obtain a lower interest rate on their existing mortgage loan. For example, a
person buying a home in 1991, with normal credit would have obtained an interest
rate of roughly 9%. The original monthly payment on their mortgage would have
been $1,609.25. Ten years later, with 20 years to go on their loan that same
person could have refinanced their mortgage when rates were at historic lows and
if they changed nothing but their interest rate (that is if they took out no
equity in the refinancing and refinanced into a 20 year loan), at a 5.75%
interest rate their new monthly payment would be $1,167.15 a $442.10 per month
savings in cashflow.
A second major reason for mortgage refinancing is to change the payment terms of
one’s present mortgage. This typically occurs when dealing with a
non-conventional (not to be confused with non-conforming, which is a credit
term) mortgage loan. In the present environment many lenders are comfortable
writing interest only loans or loans with balloon payments. In many
circumstances such loans are not intended to last more than 5-10 years and are
expected to be satisfied through a subsequent refinancing of the property. These
type of loans essentially require the consumer to either have some sort of
financial windfall near the end of their mortgage, not really need the mortgage,
or to refinance at the end of the mortgage loan.
The second largest reason for mortgage refinancing is to take out equity (also
called ‘cash back at closing’ or 'cash out') from one’s home. Such refinance
mortgages have been incredibly popular in the low interest rate environment of
the last 15 years as low mortgage interest rates have spurred both the economy
and real estate prices into a long term growth spurt thus causing many people to
have previously unimaginable amounts of equity in their homes. American
consumers have found these types of arrangements useful for debt consolidation,
funding college expenses, funding retirement (reverse mortgages), home
improvement financing, and other major expenses.
Finally, the last major reason Americans choose to do a mortgage refinance is to
extend the length of their home loan. Over the last decade many consumers have
found themselves approaching the end of their mortgage loan and rather than
enjoying a life free from a mortgage payment many have chosen to refinance to
take out cash and then extend the life of their mortgage over future years.
While this was generally a side effect of the previous reason in some cases
(such as individuals starting businesses funded largely out of their home
equity), this is actually a legitimate tax and financial planning strategy.
Make the right decisions when shopping for debt consolidation
and related financial services. Educate yourself!
Please note that the
Debt Consolidation Loan Directory
has a growing library of informative financial resources for consumers shopping
for many types of financial services, such as homeowner's and auto
insurance. Their is no better way to make decisions regarding the proper management of
your finances than to become educated. Please feel free to visit our
resources library.
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Home
Equity Loans: Questions to Ask - Check here for a list of questions you
really should ask before getting an equity loan or your home. Such as, Have you
evaluated all of your other options before using your house as collateral for a loan?
-
Understanding Credit Cards - They can be a great financial resource if
they are used responsibly. Unfortunately, for a lot of consumers, they are a big
problem when it comes to managing personal finances. This article from the
FDIC stresses the importance of evaluating your true needs and how credit card
financing
works.
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Mortgage Loan Term
Glossary - Provides definitions for some of the most common mortgage
financing
terms and phrases related to the home loanlending process like debt to income
ratio and underwriting.
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Types of Home
Equity Loans - (external web site) Learn about the two different
types of home equity loans and how they work; the Home Equity Line of Credit (HELOC)
and the Closed-End Loan. Educate yourself about the home equity lending process
by reading online (or downloading) this free guide from LowerMyBills.
