When a homeowner refinances their mortgage, this means that they apply for and obtain a new loan on their home, and subsequently the old loan is paid off with the proceeds from the new loan. In most transactions involving mortgage refinance, the homeowner applies for a new mortgage with a bank or other type of lender, there is an appraisal of the home, and when the new mortgage is approved and funds are available, the amount of money owed for the existing mortgage is paid to the original lender. Sometimes there are a few more steps involved, but this describes the basic procedure.
Most mortgage refinance loans fall into one of two categories: fixed-rate loans and adjustable-rate loans. A fixed-rate loan is a more traditional type of mortgage; the interest rate is determined at the onset of the loan and does not change over the life of the mortgage. In contrast, an adjustable-rate mortgage (ARM) has an interest rate that can vary from year-to-year or sometimes in even less time. In general, lenders offer ARMs with a low introductory interest rate. This "teaser" rate makes ARMS look very attractive initially since the monthly payment will be lower, but when the introductory rate expires, the monthly payment on an ARM can increase considerably. If a homeowner is interested in obtaining an ARM through a refinance transaction, they must ensure that they can afford the monthly payment if the ARM's interest rate were to reset to its highest possible level.
There are a number of reasons that a mortgage refinance is beneficial:
Interested in finding out if a mortgage refinance would be advantageous for you? The first step is to talk to a reputable lender about types of loans that are available. The lender will be able to advise you regarding the loan options that are best for achieving your financial goals and will also help you to calculate how much money a mortgage refinance can save you in the long run.