Refinancing involves taking out a new home loan to pay off an existing one. Refinancing is done primarily for two reasons: to save money through a lower interest rate, or to exchange a property’s equity for cash.

Say you have an adjustable rate mortgage and mortgage rates are beginning to rise. Refinancing (ideally to a fixed rate) would be the most sensible course of action as this would allow the borrower to avoid the high monthly payments associated with higher interest rates, as well as allow the borrower to move to a lower-risk loan. This can be a good idea regardless of what kind of mortgage you currently have

However, there’s more to think about than just interest rates when talking about refinancing. You could choose to refinance to decrease the term of your mortgage so that you can pay it off sooner. This is especially a good idea if your financial situation changes to allow you to afford higher monthly payments and can ultimately amount to thousands of dollars in interest savings.

Other homeowners choose to refinance not because they are overly concerned with saving money, but are instead looking for a “cash-out” type of mortgage where they can exchange some of the equity they hold in their home for cash. This is usually done by borrowers looking to a solution to pay off large debts, fund home improvement projects, or pay for other major expenses.

While refinancing very often seems like a great idea, it is not right for everyone. If you are considering refinancing, be sure that you explore your options thoroughly and consult with a financial adviser before making your decision.

This entry was posted on Wednesday, November 18th, 2009 at 3:22 pm and is filed under Home Loan, Refinancing. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.