The Big Questions about Home Mortgage Refinancing
Some homeowners may have heard of refinancing home mortgage but not known what it
exactly meant, what it entailed, or how to go about doing it. All of those
questions are easy to get answers to, but a tougher question to answer is
"when should I refinance my home mortgage " as is "why should I
refinance my home mortgage." Finally, perhaps the toughest question a homeowner
may have to ask is simply "should I refinance my home mortgage." Before
we attempt to answer those three BIG QUESTIONS, let's take a look at what
refinancing is, and what it is not.
What is home mortgage refinancing?
Home mortgage refinance is essentially the act of obtaining a new home mortgage.
This is not a "second mortgage" and it is very different from a
home equity loan or a
home equity line of credit (which we'll discuss in a bit). It may
be easier to understand home mortgage refinance if you think of it in the same
terms as buying a house in the first place, because the process is quite similar.
In a home mortgage refinance the homeowner is obtaining a new mortgage. The new
loan pays off the old one and the homeowner starts making payments to the new
lender. There may be a number of reasons a homeowner would do this, but the
primary reason most people refinance is to get a lower interest rate. Let's say
you purchased your home five years ago at a fixed rate of eight percent. It was
a good deal at the time and you were happy with the fixed rate because you knew
that if interest rates suddenly went up, the lender couldn't change the rate on
you. But interest rates went down and, for the sake of argument, let's say they
went down a lot. You're paying eight percent when you could be paying four. A home
mortgage refinance will get you out of that eight percent deal and into a more
comfortable interest rate. This action can save you thousands of dollars over
the life of the loan.
Refinancing vs. Line of credit
Many people confuse a refinance with a Line of Credit (LOC). These are actually
two entirely different animals. A refinance is intended to essentially reduce
your debt (or at least the amount you're paying) while a line of credit will have
the result of increasing it. Most people will get a home equity line of credit
when they need to make improvements or have some major purchase. The line of credit
works similarly to a revolving charge account - transactions against it will reduce
the credit line and payments to it will make that portion of the line available
again. There is much more to line of credit accounts than can be discussed here.
Suffice to say that a refinance is not a line of credit and a line of credit is
not a refinance.
The big questions about home mortgage refinance
In explaining home mortgage refinance we have already answered the
"why." The number one reason to refinance is to save money. The other
two big questions are merely situational. When should you refinance your
home mortgage? When doing so would be advantageous to you. No one is
going to refinance for a higher interest rate, of course. The other big
question, should you do it at all, also depends on the situation (Read "
The good, the bad and the ugly of home refinancing" here). If the timing is right and
there is a benefit to the refinance, by all means do it.
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