What Is A Home Mortgage Refinance – Why Would I Refinance?

You have owned your home for several years now and have been making your mortgage payment on time as agreed every month. You also know that your home’s value has gone up nearly double since you bought the home. Extra value in your home over your mortgage amount is called equity.
One way to tap into your equity for cash is with a home mortgage refinance. There are many other reasons why a homeowner chooses to refinance. You may be asking yourself, exactly what is a home mortgage refinance and why would I refinance my mortgage? Below we explore answers to both of these questions.

What Is A Home Mortgage Refinance?
If you bought your home with financing from a mortgage lender then you got a mortgage. Your mortgage has an interest rate, monthly principal and interest payments, most likely a monthly real estate tax and homeowners insurance payment, as well as either a PMI payment or a second mortgage payment. A refinance of your current home mortgage means you will most likely get a new mortgage at a different interest rate and probably a different loan amount. This new mortgage will be used to pay off the mortgage that you currently have on your home.

Why Would I Refinance?
There are many reasons why you or any other home owner would refinance. Here are a few reasons:

Refinance to get cash from your equity. As mentioned earlier, this is called a cash-out refinance. When you do a cash-out refinance you will borrow money against an appraisal for more than the amount you owe on your current mortgage plus enough to pay any closing costs plus the amount of money you want to get from your equity. When you settle your refinance mortgage you will get the extra cash 3 days later. This three day period is called your rescission period. (See How Long Is My Rescission Period On My Mortgage for more information on rescission period.)

Reasons to get cash-out include: pay off higher interest rates credit cards and loans, consolidate student loans, pay for college tuition, pay for home improvements, invest the extra cash, take a vacation, etc.

Refinance to get a lower interest rate and mortgage payment. Many homeowners have refinanced their higher interest rate mortgages to a lower rate mortgage over the years. Typically, the only time it really makes sense to refinance just for a lower rate is if you can get at least .5% lower in your interest rate. Also, if you are considering paying any discount points, make sure that you are going to keep the mortgage at least 4 years.

Along with dropping your interest rate to lower your payment, you may want to consider refinancing to eliminate Private Mortgage Insurance from your monthly payment too. More information on PMI and how to eliminate PMI from your mortgage payment.

Refinance To Change Loan Programs. Changing loan programs from an Adjustable Rate Mortgage – ARM – to a fixed rate mortgage or from a balloon mortgage are great reasons to refinance. If you do not refinance your ARM, you run the risk of a sharp increase in interest rates which could result in a mortgage payment outside of your budget.

If you do not pay off a balloon mortgage with a refinance or with a home sale, then you will have to pay your mortgage balance in full the day your mortgage balloon comes due. This could pose serious financial hardship if you are not ready for your balloon to expire.

In the case of a divorce or marriage separation, or in the case of a new marriage. If you are getting a divorce and one of the spouses is going to keep the home and both of you are on the mortgage, then the spouse staying behind will have to refinance the mortgage to get the departing spouse’s name off the mortgage. If on the other hand two people are coming together in marriage and one person owns a home and the other person is going to be on the mortgage, then the mortgage would have to be refinanced to include the second person once they are married.

To remove or add anyone to a mortgage, with the exception of assumable mortgages (FHA and VA mortgages are assumable as long as the new borrower qualifies) you will have to refinance.

Refinancing has merit and is a great idea for the right reasons. One thing to remember, each time you refinance, if you do not pay your closing costs out of your pocket your loan amount will be a little higher to cover closing costs and to establish your escrow account if necessary. Each time you refinance a little slice of your equity gets sliced away so make sure you are aware of the changes in your equity every time.