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Mortgage refinancing is a financial solution for homeowners that due to market conditions or a bad credit were forced to request and were approved for a home loan with a high interest rate and other non beneficial loan terms. Once market conditions and personal credit score have improved, refinance is the right option to get rid of such a heavy burden.

Mortgage Refinance Explained

Mortgage refinance consists on applying for a loan that will be secured with the same asset that is securing the outstanding mortgage and the money obtained will be mainly used to cancel the remaining debt. Thus, there will only be one loan remaining attached to the asset and the previous loan will be terminated.

Benefits Of Refinancing

The main benefit of such a transaction is that the borrower will be paying lower monthly payments either by a reduction on the interest rate charged for the loan or by an extension on the loan's length. Moreover, the borrower can refinance for a higher loan amount than the outstanding loan so he will be able to obtain cash out from the equity that he has build on his home.

Another use of refinance is the possibility to modify the type of interest rate paid for the loan. There are two kinds of interest rates on home loans: Fixed or variable. Fixed interest rates do not change over time so the borrower will be paying the same overall amount on interests over the whole life of the loan. Variable rate changes over time according to market conditions. Thus, the amount paid on interests may increase or decrease over the life of the loan. Fixed interest rate is recommended for those who have a conservative nature and a variable interest rate is meant for those who want to seize the benefits of market conditions and are comfortable with the idea of risking to pay a higher installment if the situation changes.

Refinancing Is Not For Everyone

Refinancing is not the solution for everyone; there are expenses and fees implied in this kind of financial transaction. So, if the amount saved by the reduction on the interest rate does not compensate the fees and expenses, refinancing makes no sense at all. Moreover, experts estimate that if by refinancing you can not obtain at least a 2% reduction on the interest rate, a refinance loan is not to your advantage.

There are situations however, where you may want to consider refinancing even if you are unable to obtain a 2% reduction on the interest rate. If you can not meet your monthly payments and you need to reduce the monthly installments so as to fit your budget, you can do so by refinancing your loan and getting a longer repayment schedule that, even if the interest rate is the same or higher, will reduce the amount of money you will have to pay each month.

You would also want to consider refinancing for an interest rate that is not 2% lower if you have built equity on your home and you want to get cash out of it. In this case however, it would be wise to consider a home equity loan too as this kind of loans also let you borrow using as collateral the equity built on your property.