Refinancing refers to applying for a secured
loan intended to replace an existing loan secured by the
same assets. The most common consumer refinancing is for
a home mortgage.
Refinancing may be undertaken to reduce interest costs to
pay off other debts, to reduce one's periodic payment obligations
to reduce risk such as by refinancing from a variable-rate
to a fixed-rate loan, and/or to liquidate some or all of
the equity that has accumulated in real property during
the tenure of ownership.
In essence, refinancing a mortgage or other
type of loan can lower the monthly payments owed on the
loan either by changing the loan to a lower interest rate,
or by extending the period of loan, so as to spread the
re-payment out over a long period of time. The money saved
can be used to pay down the principal of the loan, thus
further reducing payments. Alternately, refinancing can
be used to transform available equity in one's house into
ready cash, available for other purposes or expenses.
Another use of refinancing is to reduce the
risk associated with an existing loan. Interest rates
on adjustable-rate loans and mortgages shift up and down
based on the movements of the various prime rates used
to calculate them. By refinancing an adjustable-rate mortgage
into a fixed-rate one, the risk of interest rates increasing
dramatically is removed, thus ensuring a steady interest
rate over time.
Refinancing a loan or a series of debts
can assist in paying off high-interest debt such as credit
card debt, with lower-interest debt such as that of a
fixed-rate home mortgage. The net savings between the
two interest rates can then be applied either towards
further paying down the debt, or other purposes. In addition,
non-tax deductable debt, such as credit card or car loan
debt, can be transformed into tax-deductable debt such
as home mortgage debt, potentially lowering one's taxes
or shifting one into a more advantageous tax bracket.
This type of arrangement is often associated with a Cash-Out
Refinance.
Benefits of Home Refinancing
Imagine a scenario where you can have access to extra
cash, while simultaneously lowering your monthly mortgage
payment. This dream can become a reality through mortgage
refinancing.
A house is the largest asset you may
ever own. Likewise, your mortgage payment may be the largest
expense you’ll have in your monthly budget. Wouldn’t
it be great to use this asset to reduce your monthly payment
and put extra cash in your pocket? When you refinance
your mortgage, you can take advantage of the equity in
your home and enable this to take place.
Lower Refinance Rate, Lower Payments
When you purchased your dream home, the financial environment
dictated interest rates. While certain factors, like your
credit rating and the amount of the down payment that
you were able to afford, influenced your interest rate,
the single most important factor was the prevailing rates
at that moment. However, interest rates fluctuate. When
the Federal Reserve enters a rate-cutting period, the
prevailing rates may become significantly lower than when
you originally purchased your home.
By refinancing your mortgage when interest
rates are lower, you can exchange a higher interest rate
for a lower one, which, in turn, will lower your monthly
payment.
