Refinancing
The term refinancing is a financial term that is a method of paying off an existing loan with the proceeds from a new loan, using the same property as collateral or security for the new loan. In order for a lender to approve a refinance, the savings in interest must be weighed against all the fees the come with refinancing. The hard part of this calculation is in predicting the amount of up-front money when the savings are received.
There are several benefits to refinancing. Due to the fact that interest rates change constantly, what seems like a good rate when you made your purchase may turn out to be higher than typical rates just a few years later. Instead of paying more, refinancing can help you pay off your mortgage at around the same rate that people are paying at the time.
However, refinancing also comes at a price. You will have to pay up-front fees and closing costs again, although not maybe not as high as on your first mortgage. You will to pay another closing costs even if you mortgage is only one or two years old. You may have to pay more fees especially if you switch lenders. In some cases, there are prepayment penalties involved if you switch lenders too soon before the penalty term is over. If there are prepayment penalties involved in the existing mortgage, refinancing is less favorable because the borrower will have the pay the prepayment penalties on top of other fees at the time of the refinancing.
Refinancing can help the borrower obtain interest at a lower rate, which will reduce your monthly payments and often the overall cost of the mortgage as a result. You also may choose to consolidate all your outstanding debt by refinancing. For instance, you may choose to combine your first and second mortgage into a new one. Another good reason to refinance would be to reduce the term of your loan while increasing your monthly payments.
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