Refinance Mortgage Loan: The Basics of Refinancing Your Home Loan

Refinancing your mortgage can save you money, get your hands on cash, and help you take control of your finances, if done correctly. There are a number of common mistakes homeowners make when refinancing their mortgages that cost them thousands of dollars. Here are the basics of refinancing your home loan to help you avoid costly mistakes.

Refinancing to Save Money

If your financial situation has improved and you qualify for a better interest rate than you did when you purchased your home, you could save money by qualifying for a lower interest rate. This lower interest rate could also reduce your monthly payment amount; however, there are ways to lower your payment even you cannot qualify for a lower interest rate. If you purchased your home with a risky Adjustable Rate Mortgage (ARM) or have Private Mortgage Insurance, refinancing to a fixed rate loan could ease your peace of mind and help you lose the Private Mortgage Insurance.

Refinance and Get Cash

Refinancing your primary mortgage and taking cash back is generally more affordable than other home equity options. You will qualify for a better interest rate refinancing than you will with a second mortgage or home equity line of credit. To borrow against equity when refinancing, you simply borrow more than you owe on your existing mortgage and will receive the cash back at closing.

Consolidate Your Debt

Mortgage refinancing is a convenient way to consolidate your higher interest debts into one payment. By taking cash back when refinancing you can pay off your other debts and have just one payment. When you refinance to consolidate your bills it is important to understand that refinancing does not eliminate your debt; consolidating only restructures your debts, making them easier to pay back.

You can learn more about refinancing your mortgage while avoiding costly mistakes by registering for a free mortgage guidebook.

Refinancing your mortgage

Refinancing your mortgage can save you money, get your hands on cash, and help you take control of your finances, if done correctly

If mortgage payments are suddenly higher, the most probable aspect to blame would be the ever-rising mortgage interest rates. The reason is that since 2004 the Federal Reserve Board has raised the fed-funds rate, which influences mortgage interest rates, 17 times.

In recent years, many people have taken advantage of near-record-low interest rates while scooping for real estate properties. In order to make mortgage payments even lower, many signed up for variable-rate home mortgage refinancing options.

One of the benefits of variable is that you get an extra-low interest rate for the first few years of the loan, and then, often every year, it gets reset to reflect the actual market movements in interest rates. For a “5-1” variable-rate mortgage scheme, the loan is fixed at a low introductory rate for five years and then begins floating in relation to interest rates each year after that. However, if the market interest rates surge up, the rate of your own will consequently rise, albeit caps for regulating rates from rising too much are in place.

The risk is that one could end up paying 10% or more on a home mortgage refinancing in later years. This is not quite apparent in fixed-rate home mortgage refinancing wherein one’s loan will be locked at a rate, say 6.25%, until the whole loan is paid. The risk is not at all senseless—that is if you plan to leave the home after a few years, variable-rate home mortgage refinancing can make a lot of sense. You get an extra-low rate initially, and you are not likely to be around if and when rates escalate.

Not everyone is fortunate enough to figure out such a trick. Some are blinded by the chase of the cheapest rates out there, grabbing variable-rate mortgages for the really low introductory rates that these offer despite planning to stay in their new home. So now that the tide seems to be turning, and rates are rising, the potential heartache for a lot of people is looming. According to a report from ACORN, the national community advocacy group, about 75% of subprime home loans were variable-rate mortgages.

Many people have opted for even riskier home loans than ordinary variable-rate mortgages. Some signed up for interest-only loans and negative-amortization loans, and according to a Los Angeles Times article, "substantial numbers of borrowers using interest-only and payment-option loans have modest incomes and could already be stretched financially."

There are some suggestions that can mitigate such risks. The most reasonable would be to switch to risk-averse options such as 15-year or 30-year standard amortization schemes. Another practical tip suggests switching to an interest-only mortgage option if full payments are currently not feasible. The positive feature about interest-only payments is that these would not result in still-higher principal debt balances to pay off later.

Sandra Block offered some beneficial advice to potential borrowers in a USA Today article. She explains, "Look for lenders that have raised their borrowing limits for conforming loans. Rates on conforming loans, which are loans that lenders can sell to Fannie Mae and Freddie Mac, are a quarter to three-quarters of a percentage point lower than those for jumbo loans."

The most important advice for all is to never stop learning. By researching more information about mortgages, and home-buying process in general, one would be at a better position in getting the most suitable home mortgage refinancing deal, which mitigate the risk of frustration in due time.