Why Do Homeowners Refinance?

Getting the initial mortgage in the first place took a lot of work and effort, and by no means could it have been considered much fun. Yet the refinance industry is booming, begging the question of why homeowners refinance their loans. Secondly, is refinancing a worthwhile and money saving process?

The answer is maybe. Generally speaking, the majority of homeowners refinance their mortgages when interest rates drop and fall below the interest rate they currently have on their home loan. Since the interest rate determines the cost of the loan, it saves money to get as a low a rate as possible, and with rates dropping, it is smart to seek out cheaper mortgage products.

In some cases a homeowner might have gotten a less than advantageous interest rate based solely on a less than perfect credit score. Over time, the credit score might have risen to the level that would make the borrower eligible for a better loan product. When the refinance takes place, the overall monthly mortgage payment is lowered, and this greatly increases the monthly cash flow for the borrower.

Getting out from under the wrong loan product is the second most commonly cited reason for a refinance of a home loan. Lately this has been the case with droves of homeowners whose adjustable rate mortgages threatened to make their homes unaffordable, and who therefore sought to refinance their homes with a fixed rate mortgage which – although higher in interest than the initial adjustable rate mortgage – promised stability in a market where interest rates were beginning their steady upward trend.

The final reason why homeowners will refinance existing home loans is for the sake of equity. Perhaps the home owner needs some ready cash, wants to send the kids to college, or wants to consolidate debts using the equity of the home; in such cases the cash out refinance option provides an easy way to access a large amount of money in a short period of time.

Lenders have certain restrictions that apply to this last form of refinance; you need to have a certain percentage of equity built up before you can cash out. In some cases you need to have a reserve that will remain in place when the transaction is completed. Since refinance loans vary, it is wise to shop around and understand the restrictions of different products.

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