Options for Home Refinancing

There are many options for home refinancing; the one you choose will most likely depend on your particular circumstances as well as the reason for the refinance. In the following paragraphs, we'll look at reasons why people refinance their home mortgages as well as a few options for home refinancing.

1. Reasons for Home Refinancing

Obviously, there's a dollar sign behind your reason for refinancing your home or you wouldn't be considering it in the first place. However, the reason you have for wanting to refinance is important because there are so many ways you can refinance your home and you want to be sure you get the best advantage possible while meeting your goals. For example, maybe you just need to lower your monthly mortgage payment and would like to refinance your home with a longer loan term than you originally agreed upon.

On the other hand, perhaps you've discovered you're able to make larger mortgage payments than you are now making and you would like to refinance in order to shorten the term of your loan. While this is indeed possible, you might also consider adding to your payments each month, especially if there is no prepayment penalty attached to your mortgage. If there is such a penalty, you might want to weigh the fees associated with refinance against any prepayment penalties to see which way you would come out ahead.

Perhaps you need cold, hard cash for medical expenses or to make home improvements. If so, there are a number of ways you can go about refinancing your mortgage to get the cash you need. You'll want to become familiar with the different options for home refinancing so that you can make the best deal possible.

2. Things to Consider before You Refinance

Some homeowners make the decision to refinance simply because they need to in order to avoid foreclosure and remain in their homes. When this is the case, even though you may pay more in interest over the term of your loan, it is often worth it to the homeowners who will do just about anything to save their homes.

However, if you are refinancing specifically to save money, you should take a close look at any fees that may be associated with refinancing to make sure that you will indeed save money. Although you can recoup your refinancing investment by saving money on interest over time, how long you plan to stay in your present home may be a consideration. Depending on how much the refinancing costs, it could take a couple of years until you actually see any savings so you may want to evaluate your particular circumstances before you refinance for this reason.

If you do refinance at a lower rate of interest and remain in your home for say, 5 or more years, you are bound to realize a substantial savings, even after you subtract the cost of refinancing. If you are refinancing because you need to make home improvements, you may easily recoup the refinancing costs by the increased value, and therefore, the increased equity in your home. You will still want to take the time to evaluate your choices and do the math, but you could certainly come out ahead refinancing for this reason.

3. Adjustable Rate Mortgage Refinancing

Many people choose to refinance after their ARM (Adjustable Rate Mortgage) increases the amount of their monthly mortgage payments. While some homeowners are drawn to the ARM when interest rates are low, they are stunned at how much their mortgage payments increase when the rate of interest increases. Although most ARM's come with a built in cap, meaning the interest rate will be "capped" at a certain pre-specified rate, it can still be daunting when your mortgage payment suddenly rises hundreds of dollars each month.

On the other hand, some homeowners with a fixed rate of mortgage choose to refinance using an adjustable rate mortgage when interest rates are lower than when they first financed their home. However, just like ARM's are capped at a certain rate of interest when interest rates rise, the opposite is also true and the ARM can only go so low in most cases, even if interest rates drop lower.

4. Fixed Rate Mortgage Refinancing

If you originally took out a mortgage using a fixed rate of financing and still want to stay with a fixed rate, you still have several options for home refinancing. Obviously, if your goal is a lower monthly mortgage payment, you'll either need to increase the term of your loan or wait until the interest rate has dropped. When you are considering your options for home refinancing, it is important to look at the whole picture and understand whether or not you are really saving money in the long run.

Even if your refinance costs you more money in the long run, to many homeowners it is worth it if it makes it possible for them to avoid foreclosure and remain in their homes. To some homeowners, the home where they presently reside will be their home until they die and they will do almost anything to keep it; other homeowners live in a particular home more for investment purposes and don't mind moving if they can save money elsewhere; it just depends on your personal choices and circumstances.

5. Home Equity Loans

Home equity loans can save the day when you need cash and have built up a certain amount of equity in your home. To exercise one of these options for home refinancing, you'll generally need to have pretty good credit. The way a home equity loan works is that you will be able to borrow a percentage of the equity you have in your home minus any liens. Although some lenders will actually loan 100% of your equity minus what you still owe on your home, 80% is more typical for this type of loan.

Homeowners generally exercise this option for home refinancing when they have major expenses, such as medical bills or want to make major home improvements. Sometimes, home equity loans are taken out to fund a college education, which may be more cost effective than getting a personal loan, depending upon your unique circumstances. Home equity loans are usually disbursed in one lump sum and they are usually for a shorter loan term than the original loan.

6. Line of Credit

More options for home refinancing include the line of credit, which is similar to a home equity loan, in that the equity you have in your home is a determining factor; however, instead of receiving the funds in one lump sum as you would if you took out a home equity loan, you would have an established line of credit at your bank or with your lender. This particular option is helpful if you know you will need a substantial amount of cash, but you don't know how much and you only want to use the amount you really need.

You may be able to exercise this home refinancing option by using what amounts to a credit card, whereby you access the funds as you need them by using the card. You may also receive special checks that you can use when you want to draw on the line of credit. Although there is a pre-set limit on the amount of money you can borrow, you may never reach that limit and, of course, you will only repay what you actually borrow. However, some lenders do impose a minimum amount that you can borrow each time you access this line of credit so even if you do plan to use these funds for expenses that are not considered to be major, you may have to borrow several hundred dollars at a time.

Typically, there will be a specified amount of time in which you can actually borrow this money, although it could be as long as 10 years. Even if it is shorter, though, you may be able to renew the term. The repayment for these types of options for home refinancing can vary; you may have to pay a small amount for a set term and the rest may be due much like a balloon payment is; which would mean that the balance would be due in full and the end of the loan term.

7. Cash Out Refinance

Even though you'll most likely have to pay closing costs for these types of options for home refinancing, you can replace your mortgage and also have money in your pocket. With cash out refinancing, you actually refinance your home for more than you owe and then you are able to pocket the difference. This is also an option for homeowners who are facing major expenses and who have a certain amount of equity in their homes. Although you are refinancing for more than you owe on your home, it is still for less than the home is actually worth.

When you choose cash out refinancing as an option to refinance your home, you'll want to do so when the interest rate is lower than that of your original mortgage if at all possible. If you really need the cash and the interest rates are now higher than they were when you took out your original mortgage, you may want to consider the home equity loan or at least compare the two. You will also want to weigh the amount of closing costs against the amount you need to see if the cash out refinance is the right one for you.

8. Reverse Mortgage

A reverse mortgage has become a popular option for older homeowners; however, many people are still confused by this option. While your home doesn't have to be paid off to take advantage of a reverse mortgage, you will have to have a certain amount of equity in your home and at least one of the homeowners who live in the home must be age 62 or older. With a reverse mortgage, you can arrange to receive the funds in one lump sum or as a line of credit and you never actually have to pay the loan off.

Homeowners who have no one to leave their homes to upon their death sometimes take advantage of the reverse mortgage when they consider options for home refinancing. That doesn't mean you can't still leave your home to your loved ones if you take out a reverse mortgage; it just means that if you don't have anyone to leave your home to, you can enjoy using the money from the equity you have in your home and you can still live in your home for the rest of your life. In addition, in the case of a married couple who elect to take out a reverse mortgage, the last surviving spouse can also remain in the home for the rest of their life without worrying about having to make payments.

9. Fees Associated with Home Refinancing

There are various fees associated with most options for home refinancing and you should be aware of these up front so you can choose the option that will best suit your needs. The fees associated with the various options for home refinancing do vary and it may be that these fees can help you to decide which option is the best one for you. Depending on the option you choose, there may be application fees, closing costs, points to pay as well as specific tax implications. For example, if you regularly count the interest you pay on your home on your yearly tax return and you take out a loan for a lower interest rate, you will obviously be able to deduct less interest. Now, that is most likely a good thing but you do want to balance the tax implications against the fees you may have to pay for your refinance.

Obviously, this is something you're going to have to research in order to make the best deal. You may even want to consult a professional; however, it may be wise to speak with someone who has no interest in the decision that you make. Make sure that you read the fine print and are aware of any and all fees the refinance will cost you and try to compare different types of refinancing so you will be assured that you are getting the best refinancing deal you can make.
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