All About The Benefits of Refinancing

Benefits of Refinancing

There are some special reasons and many benefits which may be associated with refinancing a home. While there are a few situations where refinancing is not the right decision, there are a few benefits that can be gained from refinancing under favorable conditions. Some of benefits available include a lower monthly payment, debt consolidation and the ability to get access to the existing equity in the home. Homeowners who are considering refinancing should consider each of these options against their current financial situation to determine whether or not they wish to re-finance their home.

Lower Monthly Payments

For many homeowners the ability to lower their monthly payments is a very appealing benefit of refinancing. Many homeowners live paycheck to paycheck and for these homeowners finding an opportunity to decrease their payments can be a big advantage. Homeowners that are able to negotiate lower interest rates when they re-finance their home will likely see the benefit of lower monthly mortgage payments resulting from the decision to refinance.

With just about all types of loan programs, every month a homeowner submits a mortgage payment. These payments typically are used to repay a portion of the interest as well as a portion of the principle on the loan. Homeowners that are able to refinance their loan at a lower interest rate may see a decrease in the amount they are paying in both interest and principle. This may be due to the lower interest rate as well as the lower remaining balance. When a home is re-financed, a second mortgage is taken out to repay the first mortgage. If the existing mortgage was already a few years old, it is likely the homeowner already had some equity and had paid off some of the previous principle balance. This enables the homeowner to take out a smaller mortgage when they refinance their home because they are repaying a smaller debt than the original purchase price of the home.

Debt Consolidation

Some homeowners look at refinancing as a method of debt consolidation. This is especially true for homeowners that have high interest debts such as credit card debts. A debt consolidation loan enables the homeowner to use the existing equity in their home as collateral to secure a low interest loan that is large enough to repay the existing balance on the home as well as a number of other debts such as credit card debt, car loans, student loans or any other debts the homeowner may have.

When refinancing is done for reasons of debt consolidation there is not always an overall increase in savings. People that are seeking to consolidate their debts are often struggling with their monthly payments and are seeking an option which makes it easier for the homeowner to manage their monthly bills.

And, debt consolidation can also make the process of paying monthly bills easier. Homeowners who are apprehensive about participating in monthly bill pay programs may be overwhelmed by the amount of bills they have to pay each month. Even if the value of these bills is not worrisome just the act of writing several checks each month and ensuring they are sent, on time, to the correct location can be overwhelming. For this reason, many homeowners often re-finance their mortgage to lower the amount of payments they are making each month.

Getting the Existing Equity in the Home

The most popular reason for refinancing is to get access to the existing equity in the home. Homeowners who have a considerable amount of equity in their home may find they are able to cash out some of this equity for other purposes. This may include making improvements to the home, other investments, starting a business, going on a dream vacation or furthering their education. The homeowner is not limited in how they can use the equity in their home and may refinance a home equity line of credit which can be used for any purpose imaginable. A home equity line of credit (HELOC) is different from a loan because the funds are not disbursed all at once. Instead the funds are made available to the homeowner and the homeowner can withdraw these finds at anytime during the draw period or up to the maximum loan amount. Keep in mind thought, that HELOCs have variable interest rates that can, and usually do, go up.

Copyright 2007 Mark V. Schwartz - The Internet Real Estate Center

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