Mortgage refinancing is a hot topic lately, but many people are confused by what this actually means. When a homeowner refinances their mortgage, they are exchanging their existing home mortgage loan for a new mortgage loan. The proceeds of the new loan are used to entirely pay off the existing mortgage, so the existing mortgage is then retired.
People decide to refinance their current mortgage for a number of different reasons. One of the most common factors in mortgage refinances is when interest rates drop; homeowners who have a mortgage with a higher interest rate can save money over the life of their mortgage loan by switching to a mortgage with a lower interest rate. In addition, if a homeowner has equity that has built up in their home, a mortgage refinance transaction can be a good way to tap into the equity in the form of cash that the homeowner receives from taking out a larger mortgage on their home.
Another popular reason that homeowners often refinance their mortgage is to switch to a different type of mortgage loan. If interest rates are predicted to rise, for example, many homeowners may decide they are better off refinancing to a fixed rate loan.
There are a number of different mortgage refinance options from which homeowners can choose. A refinancing transaction with an increase in the size of the mortgage so that there is money left over after paying off the existing mortgage is known as a cash-out refinance. A cash-out mortgage refinance is a good option when money is needed for an event such as college tuition or a remodeling project.
FHA streamline mortgage refinances are another type of mortgage refinance options. This is only an option for homeowners who have an existing FHA mortgage loan. An FHA streamline refinancing can offer a number of advantages over a conventional refinancing transaction, including less paperwork and fewer loan costs.
No-cost refinances are a popular buzz-word in mortgage refinance options. This type of refinancing transaction occurs when the traditional costs associated with refinancing are rolled into the loan itself, so the larger monthly payments cover the upfront refinancing costs.
Other mortgage refinance options include choosing a different type of loan than the current loan, such as an ARM, a fixed rate mortgage, or a balloon mortgage. Each of these has associated pros and cons that depend on the homeowner's projected income and the length of time they intend to live in their home.
The best way to choose from among the different mortgage refinance options is for each homeowner to evaluate their own financial situation and to align their needs with the goals they hope to achieve from a refinance.