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Mortgage Refinancing: Considerations

Mar 16, 2008
You have a first mortgage that has been paid consistently and on time each month. Mortgage refinancing is being touted through audio, visual and internet advertising. Mortgage refinancing had not occurred to you - until now, when the concept and process got "in your face" thanks to that widespread advertising. It has managed to raise more questions than answers. The following information will boil mortgage refinancing down to the bare essentials.

A refinance could be a sensible option: A first-time home buyer could be overwhelmed with the initial purchase mortgage and agree to some questionable terms to complete a property purchase. This rarely happens, but when it occurs it can be rectified with mortgage refinancing. A mortgage refinancing is actually easier than obtaining the initial loan. Sometimes, a lender places a borrower in a low Adjustable Rate Mortgage (ARM) if the buyer qualifies but does not have enough funds to meet the down payment requirements for a low rate fixed mortgage. Since this mortgage interest rate adjusts periodically and the adjustment could be quite significant, mortgage refinancing can relieve the resulting situation.

The home you purchased is the largest asset you may ever own. It is also a safe investment because real estate tends to increase in value over time. Your down payment represents your initial equity in the property. As its value increases, the existing equity grows. Mortgage refinancing allows the homeowner to access some of this valuable accumulated equity.

Mortgage Refinancing Timed Explicitly: Mortgage refinancing is a sensible option when you have an adjustable rate mortgage and it is close to the rate adjustment date. Converting that ARM to a low fixed rate mortgage will stabilize your monthly payments for the life (term) of the loan. If possible, search for a rate equal or close to the current ARM. Staying with an adjustable rate would gain nothing. The monthly mortgage payments will still fluctuate when the first adjustment occurs. A fixed rate gives peace of mind with ease of budgeting.

Changing from an adjustable rate mortgage to a fixed rate loan is a very good decision. Timing is essential when you do this mortgage refinancing. This could save the homeowner a significant amount of money in the long term if it is feasible to make slightly higher monthly payments OR an annual extra payment of principal. This shortens the life of the loan and the long term savings equal the interest amount that would have been paid on the former remaining term.

Finally, a mortgage refinancing might be considered when the borrower is faced with a large expense. This could be a health emergency, a home repair or even a stretch of unemployment. Technically, mortgage refinancing is not intended to provide funds for general expenses UNLESS you get a lower interest rate in the process. Extending the term of the loan may lower the monthly payments, but will cost big bucks in interest payments because of the longer term.

Completing the mortgage refinancing experience: Mortgage refinancing is much easier than taking an initial mortgage. The time frame to completion is usually shorter and the benefits are apparent almost immediately. Most mortgage refinancing takes an average of two weeks. If the time period is longer, it could be attributed to insufficient proof of items listed on the application.

If you are taking cash from the equity you have in your home, it could require some additional time for processing. A list of projects and prices could speed up the process considerably because it justifies the reason for the additional cash. You have successfully filled out the application and provided all the requested supporting information, but a low credit score or poor payment history could be your deal breaker. Some lenders take a hard line on this number and raise the offered mortgage refinancing rate according to their credit score criteria. A score below 500 will get you absolutely nothing. On the other hand with 700 or more, you can ask for just about anything - and be assured of receiving it.

Some things can be done before starting the mortgage refinancing process. Do some research and research and then research some more. Make phone calls to banks, lenders and brokers to gather information about the term and rates and terms. Narrow your list of lenders and their offers to three or four. Number the offers in order of importance. Make an appointment with your first choice and begin the process that will result in your mortgage refinancing.
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