Monday, January 19, 2009

Mortgage Refinance: Convert an existing mortgage loan into a low cost loan.



Mortgage refinance is the process by which you pay off an existing mortgage loan with another loan having more favorable terms and conditions as well as a low rate of interest. The new loan amount may or may not be greater than the outstanding loan balance. If it is greater than the outstanding loan amount, you can use it to pay the current mortgage and spend the remaining part to accomplish you other financial obligations. If the new loan amount or the refinance loan amount is the same as the outstanding mortgage loan, it is known as mortgage refinancing. However, if it exceeds the outstanding mortgage loan, it is known as cash out refinance. For example, if you have an outstanding mortgage loan of $500000 and you take a loan of $500000, to pay off the existing mortgage loan, it is mortgage refinancing. On the other hand if the second loan exceeds $500000, it is cash out refinancing and you can use the excess amount to pay off your other debts.


If you go for mortgage refinancing, monthly payment is reduced because of the low interest rate and extension of the loan term. Not only this, you will also have the option to reduce the loan repayment term. If you reduce the loan term, the monthly payment will increase but the total payments you make towards interest during the entire term of the loan will be reduced. Moreover, if there is an appreciation in the price of the property, and your home equity increases, you can take the second mortgage loan where your home equity will act as collateral. Home equity is the difference in the amount of the mortgage loan outstanding and the present value of your property. However, you should never go for mortgage refinancing if the value of your property has gone down because the new loan may not be sufficient to pay off the existing loan.