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Should I Consider Mortgage Refinancing?

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Many homeowners are considering refinancing their home mortgage loan, and for good reason. Mortgage refinancing, which is the process of taking out a new mortgage loan and paying off the existing mortgage loan, can have a number of financial advantages. While a big step such as refinancing a mortgage is not for every homeowner, it can be a wise move, but only a careful analysis can determine if this is the case.

One of the top reasons that a homeowner would decide to pursue mortgage refinancing is to secure a lower interest rate on their home loan. When interest rates drop in the financial markets, home mortgage rates will follow suit, and a lower interest rate associated with a mortgage translates to lower monthly payments. Many adjustable rate mortgages offer lower introductory interest rates for the first several months of the loan; this makes mortgage refinancing even more attractive. Just be sure that the monthly payment associated with the possible highest interest rate for an adjustable rate mortgage is still within your budget.

Sometimes homeowners who have an adjustable rate mortgage want less risk and uncertainty associated with their monthly mortgage payment. In this situation, they may considering refinancing their adjustable rate mortgage in favor of a fixed rate mortgage, which has a set interest rate for the entire life on the loan and therefore a monthly payment that never changes.

Another reason to consider mortgage refinancing is that all else being equal, refinancing to a new mortgage of the same original loan term as the existing mortgage will result in lower monthly payments because of the longer amortization period. The monthly payment associated with a new mortgage can be much lower if a number of years of payments on the original mortgage have been made.

In addition to the preceding reasons for mortgage refinancing, some homeowners decide to refinance their home mortgage for the purpose of obtaining funds; this transaction is often called a "cash-out refinancing." If there is additional equity built up in the home through real estate appreciation or through making mortgage payments through the years, this additional equity can be accessed through a mortgage with a larger principal amount, and the excess cash is made available to the homeowner.

Before deciding on mortgage refinancing, it is very important to perform a careful cost-benefit analysis. The costs associated with the process of refinancing a mortgage are not trivial, but the benefits can make it worthwhile.