Refinancing

Once you have your mortgage and have established ownership of your home, you have the option of refinancing.

Most people refinance for one of two reasons. The first reason is to get better rates and terms, and the other reason is to get cash from the home’s equity.

Either way, refinancing can prove to be rather profitable.

The article, “Refinancing,” featured on Bankrate.com on May 1, 2006 gives an explanation of the two types of refinancing and some advice on whether or not you should refinance.

Rate and term financing depends on a variety of different factors. You have to take into account a variety of things such as if you have an adjustable-rate loan or a fixed-rate loan.

“Rate-and-term refinancing pays off one loan with the proceeds from the new loan, using the same property as collateral. This type of loan allows you to take advantage of lower interest rates or shorten the term of your mortgage to build equity faster. Rate-and-term refinancing refers to myriad strategies, including switching from an ARM to a fixed or vice versa. For example, if you have an ARM that is set to adjust upward in a few months, you can refinance into a fixed-rate mortgage. Or if you have a fixed-rate loan and you know you'll move in two or three years, you could refinance into a lower-rate 3/1 hybrid ARM.”

Cash-out refinancing is interesting because you can use the cash you receive on anything you want.

Obviously it is best not to use this cash for any purchases which do not provide a long term benefit.

Anything like that would be a complete waste of the refinancing process.

Using your refinancing cash to go on an extravagant vacation would be a waste of the money, since that purchase provides no long term benefit.

“Cash-out refinancing leaves you with additional cash above the amount needed to pay off your existing mortgage, closing costs, points and any mortgage liens. You may use the additional cash for any purpose.”

Bankrate.com has a very useful calculator that tells you if you will save money with a mortgage refinancing before you actually go through with it.

Depending on your current rate and term, a refinance may not be the best option for you.

They also give a good example on how to calculate the equity in your home.

“For example, say you bought your house for $150,000 a few years ago and borrowed $120,000. Now the house has an appraised value of $250,000 and you owe $110,000. With a cash-out refinance, you could get a mortgage for $150,000. You would pay off the $110,000 you owe and pocket the $40,000 difference, minus closing costs.”

Before you refinance you should research your options thoroughly and never settle on the first offer that comes your way.

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