The Basics of Refinancing a Mortgage

If you look at it, refinancing is a new loan to pay for the old home loan and other loans. In the case of a home loan, refinancing offers the opportunity to switch to a lower interest rate; with your other loans, you get the advantage of bunching all your debts into one big loan to be paid with your refinance money.

Refinancing

Refinancing is simply swapping an old loan with a better loan using the same collateral as security. Refinancing is also another word for cash out (taking out the small increase in your mortgage amount in cash) or loan restructuring. Money wise, refinancing is a tool to help people get their finances in order, acquire assets, or reduce their loan term or loan amount because of lower interest rates.

When the mortgage industry crashed because of soaring interest rates, refinancing became a popular option for beleaguered homeowners. Those who were saddled with interest rates as high as 9% were able to lock on to lower rates; that's translated to more money for household expenses or extra money for personal savings.

However it is not always practical to get a refinance because lower rates have been introduced. If you are going get a refinance to lower your interest by just one percent, it is not worth it. Why? When you take out a refinance, you are extending your loan term. If you are currently committed to a 25-year loan term, you are going to swap this for a longer repayment schedule. Instead of 25 years, you have to pay back your refinance on a 35 or 40 year period.

If you have been paying the old loan for 12 years, getting a refinance may not be appropriate. If you count the cost, that new loan will eventually add up your expenses. But based on your calculations and if you can break even within the next two or four years, that refinance should be considered. But if you can lower your interest rate by 2% with a refinance, take out a refinance.

The Refinance Process

When shopping for a refinance, the lender will evaluate your credit report. These days lenders are afraid to risk their money and if your credit is something you can't brag about, don't expect a fast approval of your loan application. Lenders will demand proof of your ability to pay; well, you can't blame them; lenders are also suffering from the economic crisis.

Be prepared to pay the application fee; prior to the loan approval, the lenders will request your income and tax documents. The lender will also need details of your current mortgage, employment history, assets and debts. You do have to present all the contact numbers of your previous employers in the past two years, submit a copy of your account numbers and a list of your assets and liabilities.

Lenders will also send over an assayer to evaluate the value of your property and you have to pay for this service. The assayer will check out if your home has gone up or down and the findings will affect your loan application.

However, if you are getting refinancing from the same lender that handled your first loan, it would be easier because the lender already have your records and you get faster approval than you would get from a another lender.

Article furnished by Automated Homefinder, your Boulder real estate professionals in Colorado.