TOPIC: Mortgage Refinancing

Refinancing refers to applying for a secured loan intended to replace an existing loan secured by the same assets. The most common consumer refinancing is for a home mortgage.
Refinancing may be undertaken to reduce interest costs (by refinancing at a lower rate), to pay off other debts, to reduce one's periodic payment obligations (sometimes by taking a longer-term loan), to reduce risk (such as by refinancing from a variable-rate to a fixed-rate loan), and/or to liquidate some or all of the equity that has accumulated in real property during the tenure of ownership.

Certain types of loans contain penalty clauses that are triggered by an early payment of the loan, either in its entirety or a specified portion. Also, some refinanced loans, while having lower initial payments, may result in larger total interest costs over the life of the loan, or expose the borrower to greater risks than the existing loan. Calculating the up-front, ongoing, and potentially variable costs of refinancing is an important part of the decision on whether or not to refinance.

Refinancing can be a good idea for homeowners who:
* want to get out of a high interest rate loan to take advantage of
lower rates. This is a good idea only if they intend to stay in the
house long enough to make the additional fees worthwhile.

* have an adjustable-rate mortgage (ARM) and want a fixed-rate loan
to have the certainty of knowing exactly what the mortgage payment
will be for the life of the loan.

* want to convert to an ARM with a lower interest rate or more
protective features (such as a better rate and payment caps) than
the ARM they currently have.

* want to build up equity more quickly by converting to a loan with a
shorter term.

* want to draw on the equity built up in their house to get cash for
a major purchase or for their children's education.

If you decide that refinancing is not worth the costs, ask your lender
whether you may be able to obtain all or some of the new terms you want
by agreeing to a modification of your existing loan instead of a
refinancing.

Should You Refinance Your ARM?

In deciding whether to refinance an ARM you should consider these
questions:

* Is the next interest rate adjustment on your existing loan likely
to increase your monthly payments substantially? Will the new
interest rate be two or three percentage points higher than the
prevailing rates being offered for either fixed-rate loans or other
ARMs?

* If the current mortgage sets a cap on your monthly payments, are
those payments large enough to pay off your loan by the end of the
original term? Will refinancing to a new ARM or a fixed-rate loan
enable you to pay your loan in full by the end of the term?

What Are the Costs of Refinancing?


The fees described below are the charges that you are most likely to
encounter in a refinancing.

* Application Fee. This charge imposed by your lender covers the
initial costs of processing your loan request and checking your
credit report.

* Title Search and Title Insurance. This charge will cover the cost
of examining the public record to confirm ownership of the real
estate. It also covers the cost of a policy, usually issued by a
title insurance company, that insures the policy holder in a
specific amount for any loss caused by discrepancies in the title
to the property.

Be sure to ask the company carrying the present policy if it can
re-issue your policy at a re-issue rate. You could save up to 70
percent of what it would cost you for a new policy.

Check out this nifty mortgage refinancing calculator.

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