Home Refinancing Loan

By: EconomyWatch Content   Date: 27 November 2009

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A home refinancing loan enables borrowers to obtain cash in-hand, lower interest rates or change the terms of their present loan. Regardless of the rationale of home refinancing, one can manage debt and reinstate the credit rating more effectively through it. 

Home Refinancing Loan: Types

Home loan borrowers can choose from the following refinancing alternatives, taking into consideration their specific needs and circumstances:

Fixed Rate Refinancing

A fixed rate mortgage is an excellent option for borrowers seeking long term financing, due to its inherent stability. Under a fixed mortgage, the monthly interest and principal payments remain constant throughout the life of the loan, regardless of market fluctuations. Fixed rate refinancing is a preferred alternative for risk-averse borrowers. Although the interest terms offered under such plans tend to be higher than variable-rate refinancing, one can easily shop for interest rates lower than the original home loan.

 

Adjusted Rate Mortgages (ARM) Refinancing

Conventional 25-30 year fixed interest rate home loans may not be a suitable option for everyone. In addition to more flexibility, ARM accompanies lower interests than its fixed rate counterparts. Borrowers must consider an adjustable rate mortgage refinancing when:

  • They are considering short term financing and planning to move to a new home soon.

  • They are expecting an increase in income in the near future.

  • The ARM is scheduled to reset to an even lower rate.

Additionally, one can consider a special cash-out refinancing option, which enables a borrower to refinance a mortgage for more than its current equity value. The additional cash on the loan may be utilized for home improvements or any other personal expenses. For instance, a borrower may owe $40,000 on a $100,000 house and seek $10,000 for home improvements. By obtaining a refinance home loan, the borrower can obtain a lower interest rate on the remaining $40,000 outstanding amount as well as take an additional $10,000 in cash. Hence, the value of the refinanced home loan is $50,000. Thereby, cash-out refinancing enables the borrower to replace the old loan completely with a fresh loan, having more flexible terms.

To avoid losses, a home refinancing loan decision must be based on long term considerations, rather than short term financial strain. One must analyze the current interest rate against the proposed interest rate.


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