Refinancing General Facts

Posted by  on Apr 16, 2009
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.

In addition, one 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.

Keep in mind that refinancing may be undertaken to reduce interest costs, to pay off other debts, to reduce one's periodic payment obligations to reduce risk, and to liquidate some or all of the equity that has accumulated in real property during the tenure of ownership.

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 deductible debt, such as credit card or car loan debt, can be transformed into tax-deductible 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.

No cash-out refinance might not help you lower the monthly payment or shorter your mortgage periods. It can be used for home improvement, credit card and other debt consolidation if you qualify with your current home equity; you can refinance with a loan amount larger than your current mortgage and keep the cash difference.

Additionally, closing cost refinances reduces greatly upfront fees. You will pay few upfront fees to get your new mortgage loan.
As long as the market rate is lower than your existing rate by 1.5 percentage point or more, it is financially beneficial to refinance because there is little or no cost in doing so. There are some types of loans contain penalty clauses triggered by an early payment of the loan, either in its entirety or a specified portion.

To boot, there are also closing and transaction fees typically associated with refinancing a loan or mortgage. In some cases, these fees may outweigh any savings generated through refinancing the loan itself. Usually, a person should only consider refinancing if one stands to save a substantial amount of money from doing so, either in the short or long-term, or if there is a need to extend the loan in order to pay for unexpected costs such as medical expenses.

Refinanced loans may result in larger total interest costs over the life of the loan, or expose the borrower to greater risks than the existing loan, depending on the type of loan used to refinance the existing debt.

The up-front, ongoing, and potentially variable cost of refinancing is an important part of the decision on whether or not to refinance. Refinancing lenders often require an upfront payment of a certain percentage of the total loan amount as part of the process of refinancing debt.


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