subject: Refinancing And Its Benefits [print this page] Refinancing is defined as the replacement of an existing debt/loan with another one with different terms, usually more beneficial to the debtor. The most common type of refinancing is for mortgage of homes. A debtor might want to refinance the mortgage for various reasons. Usually the debtor might want to take the advantage of better interest rates or to consolidate other debts into one single loan or to reduce the monthly repayment or to switch to a fixed rate of interest from a variable rate of interest. When the debtor seeks refinance, the result would usually show in the increase or decrease in the tenure of repayment. In case the debtor wants to move to a fixed rate of interest from a variable one, it might result in a longer term, but the advantage is that the debtor can work his finances as he is aware as to what exactly the monthly payment will entail. The debtor would be able to work on his debt liabilities easily. In case the debtor has improved his credit rating, then the chances are that there would be refinance mortgage loans that may be offered at an interest rate lower that the current mortgage rate. While debt consolidation into one single repayment may result in a lengthened tenure but certainly reduced monthly financial burden, it will also help to improve the credit rating. Refinancing may also be beneficial to those who do not pay Alternate Minimum Tax. Whatever the reasons may be for seeking refinance, it would be necessary to find out about closing costs and other fees that the refinance would include. The idea to go in for refinancing is to reduce the amount of monies paid out. Refinance rate of interest and other terms are dependent upon the debtors current credit rating, other current debts if any, the payment history and home equity as opposed to the same when the first mortgage was availed. So if the debtor has had a bad credit rating or payment history, it would be advisable to improve on those.
Mortgage refinancing may be classified into two types a Rate and/or Term refinance and a Cash-Out refinance. In a rate and/or term refinance, the debtor avails a loan that has a low interest rate and/or shorter term than that of the original loan. In this case, the home equity is not accessed or cashed in. More often than not, the principal amount availed for refinance under this scheme is usually near the original principal amount. A debtor may choose this loan as there might be a considerable decrease in the monthly payments to be made owing to a lower interest rate or alternatively to save on the total interest paid to the creditor by reducing the total tenure of the loan availed. In either case, the borrower would benefit in the total interest paid to the financer. The cash-out refinance on the other hand taps the home equity developed on the property. Home-equity would be the difference in the amount that the borrower has paid upfront and/or towards the principal amount borrowed and the fair market price of the property. For example, if Mr. Jones owes $150,000 to bank on his house that is currently having a market value of $250,000, then Mr. Jones has home-equity of $100,000. If Mr. Jones wants to capitalize on this equity, he can avail a cash-out refinance loan for the whole amount of equity or avail a part of it.
It may be advisable to seekMortgage refi as mortgage refinancing is often known, after considerable calculations are made and actual benefit assessed. While availing a rate and/or term refinance, calculations may be made as to what the actual monthly savings would be versus what was with the old loan. The borrower would also be advised on determining the time length for which the borrower is planning on staying in the current home. If for example, Ms. Maria Cutter saves $100 per month and the other costs equaled $5,000, then she would need to live in the home at least for 50 months only to recoup the costs. In case Ms. Cutter planned to move in three years time, then there would be no savings. In a cash-out refinance the borrower would have to realize that accessing the equity and availing equal or substantial part of the equity would create a loan amount higher than the original amount resulting in larger monthly payments. So before taking a refinance it would be prudent to calculate and determine which kind of refinance would be suitable.
