Four Truths About Mortgage Refinancing

Many home buyers close their loans, make their payments and don't think about their mortgages again. They don't consider refinancing when they should. If you are among these inattentive homeowners, here are four truths about mortgage refinancing that may surprise you.

Truth #1 – Mortgage Refinancing can save you money.

If interest rates have dropped since you got your original loan, refinancing can reduce your monthly payment. When you refinance, you can also choose to shorten your loan term, meaning you will pay less money in interest over the life of the mortgage.

You could also save money by switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. The interest rate on an ARM is based on an index such as the LIBOR or the U.S. Treasury Bill. If they go up, so do your payments. By refinancing to a fixed-rate mortgage, you can prevent payment increases. (Your monthly payment might still increase due to changes in property taxes or insurance, but your principle and interest amounts will stay the same.)

If your original mortgage was for more than 80 percent of your home’s value, you are paying private mortgage insurance (PMI) as part of your monthly payment. As the value of your home increases and the principle on your mortgage decreases, you can get rid of PMI by refinancing for less than 80 percent of your home’s value.

Truth #2 – Mortgage Refinancing is a smart way to access your equity.

In the second quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances. Homes refinanced during this time had appreciated 33 percent on average since the original mortgage was taken out. The median age of the mortgage was 3.2 years.

“Borrowers who are looking for an inexpensive way to finance home improvements or business investments, or to consolidate high cost debt, are turning to cash-out refinance,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “These borrowers are often willing to refinance into higher rates on their first lien mortgages. . . This is the second consecutive quarter in which the median refinance borrower increased the rate on their first lien mortgage.”

Truth #3 – Mortgage Refinancing is still very popular.

According to Frank Nothaft, Freddie Mac chief economist, “The staying power of refinance activity has been much stronger than we initially thought . . . borrowers are reacting to both incentives to cash out home equity through refinance and incentives to change their mortgage as they hit an interest rate adjustment.

Freddie Mac estimates that $500 billion in first lien mortgages will adjust this year and another $650 billion in second liens will see at least one rate change this year. Nationally, home values increased 10.2 percent over the last twelve months.

Truth #4 – Mortgage Refinancing is simpler than getting your original mortgage.

Mortgage refinancing is almost always simpler, cheaper and quicker than getting an original mortgage. The process can be handled online at sites like Simple Mortgage Refinancing. The site has helpful articles and offers free, no-obligation loan quotes.