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Understanding Home Refinancing

Jan 30, 2008
While home refinance is the current buzz term, there are millions of homeowners in the dark about its true meaning. If you are wondering whether or not home refinance would be a good idea in your situation, you should first examine the reasons why people usually do it.

You can use home refinance to lower the amount of your monthly house payments; you can use it to shorten the duration of your home loan; or you can use it to reduce the interest rate on your home loan.

If you have been watching the interest rates for any length of time, you may have realized that they are lower than they were when you took out your original home loan. It is not at all unusual for the Federal Reserve to adjust the prime lending rate, to which mortgage interest rates are tied, and if they have made a downward adjustment, you could benefit by refinancing at the lower rate.

Other Reasons To Refinance

If you have managed to improve your credit score since you took out your original home loan, you may also benefit by refinancing. Your credit score is one of the major factor lenders use to determine the interest rate on your mortgage, and if you are now a low or moderate risk borrower, you may qualify for a reduced interest loan.

You should consider home refinance if you are looking for a way to cut your monthly expenses, or if you have an adjustable rate mortgage and want to switch to a fixed rate mortgage to lock in a specific rate.

If you have accumulated some equity in your home, you can access it by home refinance. A home equity loan will give you the funds to remodel and enhance your home's value, but you can use the money in whatever way you choose.

Thinking It Through

Because refinancing does not guarantee that you will be able to get a significant reduction in the current interest rate on your home loan, you may decide that the refinancing procedure is not worth the effort involved. But you should really try to rethink that attitude, because even a small cut in your rate will mean less money going out every month in the form of a house payment. A penny save is still a penny earned, and what you save on your house payments can go towards other bills, a nest egg, or just plain fun money!

Try to see the big picture when it comes to home refinance, because a small drop in your interest rate, over the life of you loan, can add up to thousands of dollars of extra money in your pocket. If you don't believe it, use a loan calculator to figure out the actual numbers.

If you use home refinance to perform debt consolidation, you will save even more money. The low interest on your refinanced home loan will replace the high interest on the individual bills you pay each month, and as an added bonus, you will be replacing several monthly payments with a single one, on your refinancing loan.

Costs Of Refinancing

What does home refinance cost? The answer varies. But there are ways to manage your home refinance so that the costs are kept to a minimum. You can even avoid having to pay closing costs on your refinancing package by having them added to the total of your loan.

But if you have the available funds, taking care of the closing costs up front can work to your advantage, simply because you won't be paying interest on them for the duration of your refinancing loan.
About the Author
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