What is Refinance ?

This is probably the most basic question that really needs to answer. Just the word Refinance can mean different things depending on your goals. You may be looking to only lower your interest rate, maybe to lower your monthly expenses or to consolidate debt. It could be that you only want to have one payment left to deal with or you want to take money out of the equity in your home for a particular reason (home improvements, new car, college tuition or investment purposes, etc.). Whatever your reasons, it is important to know that you can accomplish these goals by refinancing your mortgage.


First Understand What Your Mortgage Is

When you purchased your home you took out a mortgage against it. In other words, you had to borrow money from a lender to pay for the home. The reality is that the bank has a lien against your home. A lien is a legal term for the right to hold your property as security until the debt which it secures is paid in full. If you were to look at the title to your home, you would see a lien in the name of your lender. When the mortgage note (loan) is paid for in full, then you will own the home free and clear and the mortgage lien will then be removed from the title or deed. Does this make sense so far?

Having said all that let me explain what a Refinance is! A refinance is simply taking out another mortgage to pay off the existing mortgage and replacing the old one with new terms. There are many options available to you when you refinance, again depending on your goals. Keep in mind that not all your goals may be accomplished. There are certain factors that are required in order to be able to qualify for a refinance.

I hope this post has helped increase your Refinance Knowledge by giving you a basic understanding of what a refinance is.

Should I Refinance ?

Read the following before you consider to refinance your home

Mortgage refinancing refers to the process of taking out a new home mortgage and using some or all of the proceeds to pay off an existing mortgage on your home. The main purpose of refinancing is to obtain a lower interest rate or lower your monthly payments by extending the term of your loan. Remember that if you extend the term of the loan, you will reduce your monthly mortgage, but you will end up paying more total interest over the years.

If you do refinance your home mortgage, you want to make sure that your monthly savings from refinancing will pay back the costs that are associated with refinancing while you are still living in your home. If you move before your refinancing has paid for itself, you really won't be saving any money. You can determine how long it will take for you to pay off the refinancing by dividing the cost of refinancing (points, closing costs, and private mortgage insurance) by the amount you will save each month from refinancing. Alternatively, you can eliminate the problem if you can find a no-point, no-closing-cost mortgage.

Generally, there are two types of mortgage refinancing: no cash-out refinancing and cash-out refinancing. No cash-out refinancing occurs when the amount of the new loan does not exceed the mortgage debt that you currently owe. Typically, you can borrow up to 95 percent of your home's appraised value with this type of refinancing.

Cash-out refinancing occurs when you borrow more than you owe on your current mortgage. You are generally limited to borrowing no more than 75 to 80 percent of your home's appraised value with cash-out refinancing. You can use the excess proceeds in any way you wish. Most people use this type of refinancing to pay off other outstanding loans, since the interest rate they pay on the extra cash they borrow will usually be less than the interest rate on the debt that they pay off (e.g., car loans, credit cards). Also, mortgage interest is typically tax deductible, while consumer debt is not. This strategy is useful if you use it to reduce your debt payments and you do not start charging items on your credit card again.

Here are a few pointers to help you with
any customization you might want to do

Basically, people refinance because they either want to save money or to spend money. This part discusses the most common circumstances in which you might save money by refinancing.

One of the ways to save money is to obtain a loan with a shorter life compared to your current loan.

There may be conditions which require you save money in the short-run. An Adjustable Rate Mortgage (ARM) with a low start-rate can temporarily lower your mortgage payments. Depending on the loan, you could substantially reduce your payments for a year or more.

You might believe you'll save money in the long-run by switching from an ARM to a fixed-rate loan--and you could be right. In this case, you're assuming that rates will eventually increase enough to justify the cost of refinancing. There is less certainty of saving money in this scenario because the future is unknown and rate comparisons are hypothetical.

Whatever your reason for refinancing, the process begins by comparing the various loan options you have available, including keeping your current loan. Real estate loans usually have income tax effects. Before rushing into a new loan, consider having your figures checked by your tax advisor. Talk to your current lender. They may reduce some of their fees in an effort to keep your business, or because they may have reduced paperwork.

For each loan you are considering, obtain an amortization schedule and Good Faith Estimate (GFE). A complete amortization schedule will identify the principal and interest portion of your monthly payments over the life of the loan. With it, you can accurately determine the interest paid within any time period. The (GFE) will itemize costs associated with obtaining the loan. The immediate costs of the transaction will be shown on the GFE, while the interest expense over time will appear on the amortization schedule. The information in these documents is required to make an informed decision regarding the best loan for you.