Mortgage Refinancing

The basics about refinancing your mortgage

Mortgage refinancing replaces your existing loan obligations with a new loan that has different repayment terms. Home mortgage refinancing is usually done in order to lower monthly payments by extending the amortization period. However, there are other reasons for refinancing your mortgage: you can do it to free up some of your home equity, or you can do it to take advantage of lower interest rates if they've dropped since you first arranged your mortgage.

Advantages of Mortgage Refinancing

You gain more control over the length of your mortgage and the amount of your monthly mortgage payment if you refinance. For example, if you signed a variable rate mortgage but you're finding that rising interest rates are putting you at a financial disadvantage, you can refinance to a fixed rate mortgage that won't be subject to market fluctuations.

Another advantage of mortgage refinancing is that it allows you to use some of your home equity for other purposes, such as paying off your credit cards or investing at a higher rate of return. While a mortgage refinancing loan won't free up the kind of equity that a financial product like a reverse mortgage will, you can still access a sizeable amount of money to use for something else.

Drawbacks and Risks of Refinancing Your Mortgage

While taking advantage of home mortgage refinancing can relieve some of your financial burdens, it can create others. Most mortgages have an early termination penalty, and that's exactly what you'll be doing when you refinance your mortgage — paying your existing mortgage off in full and taking out another one with different terms. Thus, you'll be subject to any early termination penalties that are written into your original mortgage contract.

You also need to be very careful with interest, penalties and fees, especially when it comes to bad credit mortgage refinancing. Use a mortgage calculator to work through all the upfront and ongoing costs you'll face, and take extra caution if you'll be subject to any variable terms or conditions.

One thing you can do to lower your monthly payments down the road is pay more "points" or "premiums" (depending on the terminology your lender uses) up front. Points, which are expressed as a percentage of the total loan amount, are due when the mortgage closes; for example, you'd have to pay $3,000 at closing if your broker charged three points on a $100,000 loan. The points go towards the balance owing, allowing you to lower monthly payments by taking a chunk out of the overall loan amount from the get-go.

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