Refinancing is when you replace your existing mortgage with a new one from either the same lender or a new lending company. This is usually done to get a better interest rate to reduce monthly repayments or to release home equity funds.
In many cases, a refinance loan is used to acquire money for things other than paying off the existing mortgage. In essence, the homeowner borrows more money than he owes on the home. This is referred to as the cash out option since the homeowner opts to take additional cash out of the equity of his home when refinancing.
Although the original mortgage might get paid off with the proceeds from the refinance loan, other financial matters might be taken care of as well. In particular, refinancing an existing home loan for more money than the homeowner owes to the lender is an excellent way to obtain sufficient funds to consolidate debts.
Consolidating debts into one loan typically lowers monthly expenditure while saving exorbitant interest fees. Instead of retaining a lot of individual bills each month, the homeowner is able to consolidate all of his bills into one. Not only does this save him money, but also, it saves him the time and frustration of dealing with lots of small bills that lead to large fees in interest charges or late fees.
Refinancing an existing home loan for more money than the homeowner owes to the lender is also used for other financial matters. Some of these can include but are not limited to home remodeling, education expenses, wedding expenses, vacations, and more.
One of the most common reasons to refinance your current mortgage is to get a better rate which translates into lower monthly repayments. However, you have to keep in mind that you will not see savings right away.
This is because financial institutions charge certain fees when you take out a new mortgage, and often you will have to pay a penalty for canceling your old mortgage.
If you can determine your break even point, then you can start figuring out when you will start saving money. It is a very simple calculation to do
Calculate how much you will save by lowering your monthly payment. Then add the costs associated with refinancing and divide the total by your monthly savings. This will give you an idea of the number of months it will take to recover your costs for refinancing. The so called break even point
Since the equity of the home will come into play with the cash out loan, it is important to understand the meaning of the words, home equity. Home equity refers to the current monetary value of the home. It is calculated by taking the current market value of the property and subtracting the current debt owed on the property.
Any additional structures on the property are included in the market value appraisal. Likewise, all existing loans are included in the determination of the debt owed on the property. For example, the current market value of the home is $150,000.00. The current amount of debt is $50,000.00. You subtract the debt of $50,000.00 from the market value of $150,000.00. The home equity is then determined to be $100,000.00.
Thus, you can use up to $100,000.00 to consolidate debt for example and increase your monthly cash flow.
Author Resource:-
Zulika van Heerden is an expert on mortgage financing and provides free information on her site for homeowners. To read more tips and techniques like the ones in this article go to: http://www.globalproperty.co.za
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