The main purpose of mortgage refinancing is to pay off an existing mortgage and replace it with a new one, primarily with the objective of lowering the interest rate. It is also done to release some of the equity in the property. Mortgage refinancing is often the cheapest way to raise large amounts of money either for use as capital or for debt consolidation. If the property is owned for a considerable number of years, it can be refinanced for an amount much higher that what is actually owed.

Traditionally refinancing means changing the lender because the old lender stands to loose with the lower interest rate. The terms of the mortgage, including the number of years, also may change

The refinancing market has seen spectacular growth over the last several years and till recently the interest rates were at their lowest level in decades.

The primary reasons for refinancing mortgages are:

• Freeing the equity on your home
• To avail better interest rate
• Reducing the amount of monthly payments

However, home improvement is the most popular reasons for refinancing. This has the extra advantage of adding value to the house and, therefore, attracts better interest rates from lenders.

Interest rates

Refinancing can be availed at the following types of interest rates:

• a fixed rate mortgage

• adjustable rate mortgage

• a hybrid loan

The fixed rate option helps a homeowner to keep his payment stable, though there will be no drop in the interest even in the case of a fall in bank lending rates. The ARM option is favorable when there is likely to be a drop in the bank interest rates. Interest rate is likely to increase unexpectedly with the rise in adjustable rate index. A hybrid loan is a combination of both fixed and adjustable interest rates


Refinancing options

The options for mortgage refinancing are as follows:

• Increase savings

Try for a lower mortgage rate and save on monthly interests

• Faster mortgage payment

By shortening the mortgage period one may pay more every month and the payment period is considerably reduced.

• Liquidity needs

By borrowing more than the balance loan amount one can use the money to pay off high interest debts like credit cards balance or higher installment loans

• To pay off high interest second mortgage

With high home equity one can refinance the second mortgage and combine both the loans. The new loan amount is likely to be less than the combined loan on both

•
Convert from an ARM to an FRM

Repay the variable interest loan and opt for stable monthly payments through the loan period.