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A home mortgage refinance is the
application for a secured loan that will replace the first mortgage
secured by a property.
Home Mortgage Refinance Loan
Borrowers seek home mortgage refinancing for many reasons, including lower interest rates, reduced monthly payments, transition from adjustable-rate to fixed rate and the liquidation of the property's equity.
Most home mortgage refinancings lower the monthly payments of a mortgage through the reduction of the loan's interest rate or through the extension of the repayment term to a longer period of time. Borrowers can use savings to pay down the principal of the mortgage, reducing future payments. For example, a borrower who owes $50,000 on his mortgage can use a $25,000 inheritance to pay down the mortgage and refinance the remaining balance for a drastically lower monthly payment.
Other borrowers look to take the equity out of their home. For example, a borrower owes $50,000 on his mortgage. His property is worth $200,000. The borrower can refinance the property for $100,000, taking $50,000 in cash out of the property's equity. This money may be used for a variety of purposes, including paying off credit card debt or remodeling the home.
The usage of equity to pay off high-interest debt, such as credit card debt, provides the borrower with a lower-interest rate at a fixed payment. The savings generated through the consolidation of debts can be used to pay off the debt faster. The interest on the mortgage is often tax deductible, while credit card and auto loan interest is not. This can help in lowering a borrower's tax obligation.
Interest rates on adjustable-loans change over time, going up and down with the prime rate that is used for calculation. Many borrowers refinance their adjustable-rate mortgages into fixed-rate mortgages, removing the risk of a rising interest rate.
The disadvantages of home mortgage refinancing
Certain mortgages have terms that make refinancing less advantageous, such as prepayment penalties. In addition, mortgage refinancing often requires closing and transaction fees that add to the cost of the transaction. The cost of the home mortgage refinancing can often outweigh the savings found through refinancing.
Borrowers are advised to carefully consider any home mortgage refinancing decision. A consumer should only refinance if there is a substantial benefit, either through the reduction of cost or the extraction of equity for necessary reasons.
A refinanced mortgage can lower the monthly payment of a mortgage, yet increase the overall cost of the mortgage. When a mortgage is refinanced for a longer term, the total interest charged over the life of the loan is increased. Borrowers should consider the up-front, on-going and total costs of the new mortgage before they refinance.
The inclusion of points in home mortgage refinancing
Many home mortgage refinancing lenders require the up-front payment of a percentage of the total loan amount. This is called the payment of "points" or "premiums." The point is equal to 1% of the total loan amount. For example, if the refinance option you choose requires you to pay three points, you will have to pay 3% of the total loan amount at closing, in addition to other closing costs. Lenders offer mortgage borrowers a variety of points and interest rate combinations. The more points you pay, the lower the interest rate you receive on your home mortgage refinance.
If a borrower pays the extra money up front
in the form of points, he will have lower monthly payments throughout the
loan.
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Alabama home mortgage refinance
loan |
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