What does refinancing a mortgage loan mean?

What is mortgage refinancing? Can I save money by refinancing my home loan?
asked Dec 17, 2012 in Mortgages by answernest

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So you've likely heard of people and commercials mentioning refinancing.  Refinance your home loan and save!  Refinance your XYZ Mortgage and your monthly payment will only be $***.  There are lots of claims and sadly enough there are some shady marketing tactics used in the Mortgage Loan business and refinancing is no different.  Mortgage refinancing is a gigantic business.  Some companies claims are simply claims, they claim to save you money but does refinancing really save you money?  We'll discuss what refinancing is and if it can save you money.
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Mortgage Refinancing is the act of replacing an existing mortgage loan with a different mortgage loan, usually one that benefits the home owner.  The benefits from acquiring a new home loan to replace your existing home loan are usually attributed to a lower interest rate.  Let's assume you purchased your home last year.  Interest rates for a conventional 30 year fixed mortgage were 6.20% and today they are 6%.  This would equate to .2% savings in interest rate on your mortgage loan.  A .2% savings in interest rate doesn't sound significant but in fact for every $100,000 this would equate to approximately $150 a year in savings.  Often times, mortgage refinancing is done to save a significant amount of money.  There are specific lenders that specialize in mortgage refinancing so their specialists can help.  As with anything, beware of refinance companies offering outrageously low interest rates.  Be sure to read all the fine print and ask questions.

You can refinance any mortgage.  Consider refinancing the act of selling and purchasing a new home loan only you don't have to mess with selling your old home loan.  SO the question often raised is, "should I refinance"?

Should you refinance?  This is a question you need to answer by comparing your current home loan to a new or current home loan.  You won't always save money by refinancing so be sure to run your calculations to ensure it's a favorable decision.  You never know, you may have locked in several years ago when interest rates were low and it could be that we never see rates as low so refinancing your mortgage would be a bad move.

Another reason to refinance your mortgage loan is to shorten the term of your mortgage.  Assume you have a 30 year fixed rate and now interest rates are much lower, such that you can get into a 20 year or even 15 year fixed rate for the same monthly payment.  This would be a choice scenario in that you won't be paying as much interest and build equity much quicker.

Find out if refinancing your mortgage will save you money.  Click here for free mortgage refinancing rates.

There are many reasons to consider refinancing and each household's situation is a bit different.  Don't assume mortgage refinancing instantly means savings.  Often times it can save you money but be sure to compare your home loan with what's currently available and if a current interest rate is favorable then consider it.

answered Dec 17, 2012 by answernest