What Circumstances Should Dictate Mortgage Refinancing

There are certain circumstances that come into play in terms of mortgage refinancing. A cash strapped home owner may benefit from a refinance, if the interest rates they are paying are making the property unaffordable. In some circumstances a refinance is a good thing, but in others it may not be so good, it just depends in the financial position of the individual.

With a refinance the underlying loan is repaid before the end of term and a new loan is taken out. There are a number of reasons for doing this and as we said, interest rates are a key factor. If a home loan is linked to an adjustable rates mortgage, or sub-prime mortgage it can become unaffordable, particularly if the economy is bad. Many of these loans were initiated when the economy was strong and now home owners are losing their property as they can no longer afford the re-payments.

Mortgage refinancing is also a way the property owner is able to get their hands on the equity which has grown in the property. They may need this to purchase a second property for investment purposes, or they may need it for another large financial expenditure. Refinance can also be used for debt consolidation.

It can cost as much as 3-6% of the principal amount of the loan to refinance and this is an expensive consideration. Basically the methodology for a loan refinance is the same as taking out an original loan and all the same steps have to be taken. The property has to be appraised, a title search conducted, and application fees applied.

It is for this reason that any home owner considering refinancing their mortgage, has to determine the reason why, and whether it will be of any real benefit.

The best possible reason why any home owner would want to refinance their home loan would be to negotiate a better interest rate. If you are able to reduce the amount of the interest on you present loan by 2%, it is generally believed to be worthwhile, although some lenders advocate that 1% is sufficient.

The premise is that if you are able to reduce your interest rate, you will be able to save more money. This decreases the amount of monthly payment you are required to meet and this can help you to build equity in your home. Take a look at a simple example to illustrate this:

This simple example illustrates how this may apply: You have a home loan for $100,000 and at 9% interest over a 30 year terms you pay, $804.62 per month. Reduce your interest rate by 3% to 6% and your monthly payments will be, $599.55, a substantial saving!

The author has been in the real estate business for more than 18 years. For more articles like this you should swingby his website which covers everything from refinance home mortgage loans to mortgage loans first time home buyer with no credit.