Mortgage Consultants Group

Refinancing Loans

Why refinance?

Often, home owners that already have a mortgage, choose to take out a second mortgage that pays off the first one. Typically, refinancing is done to tap in on equity or to take advantage of lower interest rates available because of improved credit, better loan options, or an improved economy.

There are several reasons why you may want to consider refinancing. These might include:

  • You have built up some equity and would like to borrow against it.
  • Your Adjustable Rate Mortgage has just passed the initial low-interest phase, so your payment is increasing in size.
  • You have incurred an unexpected large expense that is not covered by your current cash flow.
  • Your initial loan structure no longer meets your current needs.
  • Due to improved credit or an improved economy, better loan options are now available.
  • You want to consolidate several debts into one.
  • On your original loan you did not have enough money to make a down payment, so you were required to purchase Private Mortgage Insurance (PMI), but now that you have paid the loan down, you could avoid PMI by refinancing.

Refinancing is one way of solving these problems, but you need to know some information to make sure that the benefits (possible lower interest rate and/or payment or extra cash) will outweigh the disadvantages (increased debt load or length of time before being debt free, or refinancing costs). You don't want to be surprised at the loan closing with costs you are not prepared for.

Potential problems associated with refinancing

Remember that refinancing will use current appraisal values, so the current real estate market will determine whether that is higher or lower than the amount at which the home was originally valued. Although this may go in your favor, in an economy slump, it may decrease the amount of money you can borrow and/or increase your interest rate. When the economy is down, your credit score may likewise go down because it is harder to make payments on time.

The length of time that you have owned your home will also influence your refinancing options. Your payment history, the new loan guidelines defining the length of time you must have owned before refinancing, and the amount of equity you currently have in your home will all come into play as you pursue your options.

Some of the costs that you may incur when refinancing

The costs assiciated with refinancing may vary depending on the conditions of the original loan and the specific details of the refinanced loan. However, these are some industry standards that you should keep in mind:

  • the same type of loan fees as in your original loan (such as appraisal costs, attorney and inspection fees, application fees, and title search fees)
  • early payment penalties (from your original loan)
  • long term costs (such as higher interest rates for no cost financing)

As with any financing, you should weigh all the factors relevant to your loan.

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