Home refinance is a process of making a loan arrangement to replace an existing mortgage. The home owners use the equity accumulated in their property to repay the loan amount. Many financial institutions offer home refinancing and there are various kinds of refinancing options available. Home refinancing is appropriate for homeowners who wish to change their home loan from one mortgage to another depending on their interest and circumstances.
The main reason for home refinance is to save money by reducing the interest burden from time to time. Low mortgage interest rates make home refinance an attractive option for many. But before going into the process of home refinance it is important to know what home refinancing is all about. Home refinancing involves the merging of a new loan with an existing loan so that the monthly payments can be decreased or adjusted.
There are two kinds of home refinancing options, namely, mortgage refinance or home refinance loan. Mortgage refinance allows borrowers to combine the existing loans with a new loan at reduced rates of interest. It is also known as debt consolidation. The procedure of home refinance is very similar to that of mortgage refinancing.
In both the procedures, a borrower must qualify for the loan. Borrowers with poor credit score are not eligible for home refinance as they have to pay high interest rates. In some cases, the borrowers having poor credit score need not apply for refinancing themselves as third party companies offer home refinance at a lesser rate of interest as compared to the first lender. In some other cases, the borrowers can approach a lender directly. Home owners need to convince the lender by providing sufficient documentation and details about their present financial status.
The second type of home refinance deals with reduction of the interest payment. For instance, if you pay increased closing costs, you can get a considerable discount. If you have a home equity mortgage debt and a high interest rate, you can make good savings on interest as you will receive a tax credit. Hence, you can make best use of the interest deduction.
Mortgage refinance is based on two basic principles: debt-to-income and debt-to-expenditure. According to debt-to-income principle, a home owner calculates the debt, including installment and interest payments, over the period of loan repayment. This calculation is done taking into account the amount of income available after expenses have been deducted. This figure represents the debt-to-income ratio. On the other hand, debt-to-expenditure principle refers to the calculation of the money that is available to pay off the principal loan within a specified time period. This is calculated by dividing the amount of principal loan balance by the total amount of payments made over time.
Refinance mortgages allow home owners to reduce their monthly payments by extending the term of the loan or by adjusting the interest rates or the amount of the loan itself. Home owners can choose to have the loan terms lengthened or adjusted, so that they can have significantly lower interest rates. Sometimes, home owners get refinance loan to replace existing loans which are either beyond their reach or are otherwise of poor credit quality. If the home loan is replaced with a second mortgage, the monthly payments could be lowered further.
You may need mortgage refinancing if your home has dropped in value. If this is the case, you may also avail of the benefits of private mortgage insurance. This is offered by a number of financial institutions and it aims to provide financial help to individuals who have dip their hands into equity investments. The private mortgage insurance is a type of insurance that is offered against the equity that a person has in his home.