When Mortgage Refinancing Is an Excellent Idea
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by: marciafreeman
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In mortgage refinancing, a property owner, often someone who has a mortgage on their home, takes out a second mortgage that has better terms than the first mortgage did. As part of the process, the mortgage holder pays the remainder of the old mortgage with the new mortgage, basically replacing the first mortgage with the second mortgage. If the new mortgages terms are chosen carefully, mortgage refinancing can be a valuable method of improving ones finances.
For instance, mortgages with a lower interest rate are usually an excellent investment. In determining the total cost of any type of loan, the interest rate is the variable with the most weight, so a mortgage with a lower interest rate usually offers substantial savings. However, if a new mortgage offers a lower monthly payment, but the interest rate is no lower than the old mortgages interest rate, the new mortgage will have a higher total cost. This effect can be seen in mortgages that have a higher interest rate but drop the monthly payments by extending the term of the loan. Because this kind of loan can be ruinously expensive in the long run, it should be chosen only if the homeowner cannot make higher payments because of relatively short term financial difficulties, but knows he or she will be able to make higher payments soon.
Another factor to take into account is whether the new or old mortgage have extra fees tacked onto them. For example, mortgages commonly have a penalty attached that levies a substantial fee if the holder pays off the loan within a certain period after taking out the loan. The penalty is intended to keep the mortgage open long enough for the bank to make a decent profit from it. Most mortgages have a penalty of this type, but it rarely poses a problem. The penalty period is usually so short (for example, one year on a twenty to thirty year loan), that it is extremely uncommon for a mortgage holder to pay off the mortgage or get mortgage refinancing during the penalty period. However, if the loan is one of the few with a longer penalty period, the homeowner can effectively be prevented from getting mortgage refinancing during a period when interest rates have dropped to attractively low levels. The savings of a new mortgage with better terms may be completely offset by the fees incurred by paying off a mortgage within the penalty period.
However, mortgage refinancing is a sound financial move if the first mortgages penalty period has passed, interest rates are low, and fixed rate mortgages are available. Paying attention to all the terms, including the ones the lender does not point out, can pay off in major savings. With some thought and care, mortgage refinancing can lead to increased financial stability and a bright financial outlook.
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