Mortgage Refinancing is where a new loan is created for a piece of property that already has a mortgage on the books. When a property is refinanced, the first loan is paid off and a new loan agreement is created. Most people choose to refinance a mortgage in order to take advantage of lower interest rates, but some do it to shorten loan terms or to access the cash that can come from their home equity. In term or rate refinances, the borrower gets a new loan with reduced term or interest without tapping into their equity, and in most cases, the new loan is more than the old one.
Cash out mortgage refinancing is where the property owner gets cash by tapping into the equity they've built in their property. Equity is the difference between what one owes on a property and its actual worth. For instance, if a homeowner owes $100,000 on a $150,000 property, the owner has $50,000 equity. If they so choose, they can refinance their home, get a new loan, and get some money from the equity they've built up.
On a term/rate refinance, the borrower should figure out how much they will actually save per month, comparing the new loan to the old one. Then, they should find out how much the new mortgage will cost. Most come with origination fees, points or prepaid interest, appraisal and escrow fees, credit check, tax and title fees. Then, they need to think about how long they will be staying in their home. Once one has all this information, they can figure how long they need to keep the property in order to justify the new mortgage.
For example, if a mortgage allows a person to save one hundred dollars per month, and its upfront cost was five thousand dollars, they would need to stay in the home for a bit over four years to earn back the cost of the new loan. If they plan to only stay for a couple of years, it wouldn't be financially sound to refinance, because the loan would cost more than the borrower could save. For those that plan to stay in their current home for the foreseeable future, mortgage refinancing can be a good way to save money or to increase cash flow when it's most needed.
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