Refinancing

There are many reasons for a homeowner to refinance their current loan, which is in essence trading your old loan for a new one, and all have to do with saving a significant amount of money. With refinancing, homeowners can potentially capitalize on factors such as an improved credit scores, in order to obtain a lower monthly payment as well as paying off their loan faster. However, it is not an easy decision because the costs of refinancing are considerable, and can often eat away at your potential savings.

Three major reasons for refinancing are:

• Debt consolidation. High interest credit cards often pose a frightening problem to debtors, especially if they are looking at multiple payments to separate lenders. Debt consolidation loans are tailored with the specific goal of freeing the customer from paying outrageous interest rates.

• Home renovations/additions. One major reason that homeowners consider refinancing is to obtain a certain amount of money for home improvements. Generally, the biggest difference between refinancing and obtaining a home equity loan is that when you refinance, you are paying off your old loan and replacing it with a new one. With home equity loans, often called second mortgages, you are borrowing against the equity in your house with a second loan in addition to the original. And with a cash out home equity loan, you receive a lump sum of money at closing, which is used for repairs or other renovation projects. A home equity loan is often best for homeowners who know in advance how much money they will need. If not, then another option called a HELOC (home equity line of credit) is available. This loan acts just like a credit card — it is a revolving line of credit, meaning that you only pay interest on the money you use and you can draw out only as much as you need. This allows for extremely personal control over your funds, and access to them is as convenient as the nearest ATM.

• Lower mortgage payments. Most homeowners refinance to take advantage of rates that have dropped 2% or more below their current rate. They also save money by switching their mortgage plans, from say a balloon mortgage or a fixed rate to an adjustable rate mortgage. This would lower their monthly payments by a considerable amount, and if the loan term is adjusted as well, say from a 15-year to a 30-year, the payments could be reduced by hundreds of dollars. Conversely, if a 30-year loan was reduced to 15-year plan, it would normally raise the monthly payments considerably. But if the interest rate is lowered, then you could end up with slightly lower payments, while paying off the loan in half the time while saving thousands of dollars in interest.

The reasons for refinancing can be numerous, and the results beneficial, however closing costs must be taken into account. Refinancing can run you anywhere from $500-$5,000, with costs including: underwriting fees, processing fees, loan origination fees, taxes and insurance, prepaid discount points, administration fees such as recording and notary fees, and a deposit into your escrow account. Fees can easily add up to thousands of dollars, so homeowners are encouraged to do a "break-even analysis." This is where the monthly savings are weighed against the costs and the "break-even period" is calculated: the amount of time needed for the homeowner to recoup their losses.