Mortgage Refinancing and its advantages

   

Al Zan - 06/29/08

The payoff of a previous mortgage by the money obtained from a new mortgage secured over the same property is known as mortgage refinancing. This is generally done for securing a lower rate of interest. Both mortgages are secured on the same property and thus repayment of the previous loan is immediate. The new mortgage can only be used for repayment and no other purpose, except if any of the loan amount is present after the previous loan is repaid it can be used for any other purpose.

Refinance can be used for a number of uses, such as Home improvement, lower interest rate, increase repayment period, reduce monthly payment and change in rate e.g. from fixed to adjustable etc. For uses such as home improvement a loan is secured for an amount more than the outstanding amount so the excess after repayment can be spent on home renovations.

For reduction in monthly payments a new loan can be taken with a longer payback period leading to reduced monthly payments though it might have a higher rate of interest. There has to be a balance achieved between the time period and rate of interest as both are correlated and increase in one leads to an effect in the other. If there is fear of an increase in interest rates in the variable interest rate category it is better to refinance with a mortgage which has a fixed rate. If it is predicted that in the coming months there shall be a reduction in the variable rate of interest it is beneficial for the customer to refinance with a variable rate of interest.

If you can afford to pay higher monthly payments you can reduce the time period on repayment as well. A good time to refinance is when the rate of interest on mortgages has dropped. The thumb rule in such a situation is to go in for a refinance when the difference in interest rate is more than 2%. There is no limit to the number of times you go in for mortgage refinancing.

It is generally advised when the value of property is running low you should refrain from refinancing. If you have been repaying your existing mortgage for a long time period there is no reason for refinancing where the new mortgage has a long time period as well as this would increase overall payment made. If the repayment period left is very short there is no use in refinancing as again it would lead to increase in the overall payment made.

There is no fixed rule as to when to refinance and when you should not, it is according to the wishes and the need of each individual customer. Each customer according to his needs, his advantage or in the face of contingencies has the prevailing option to refinance.

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