Steps To Refinancing A Mortgage

The steps to refinancing a mortgage begin with getting clear on the purpose of the refinancing. Mortgage refinancing has become very popular in the past decade, not always for entirely the best reasons. If you don't carefully complete the first of the crucial steps to refinancing a mortgage, you can find you have gone through the whole stressful process of refinancing a mortgage for little or no benefit.

If you are going to take the step of refinancing your mortgage, you want to be sure that the effort and stress have been worthwhile. Don't just "go along with the crowd" - know what you want to achieve.

Every situation is different, and every family will have slightly different reasons for wanting to refinance a mortgage. Generally, however, for most people, the reason (or reasons) for refinancing fall into one of five major categories.

1. Reducing Monthly Mortgage Payments

The standard residential mortgage in the US is a 30-year, fixed interest mortgage with fixed repayments. If you took out a mortgage in the high-interest late 80s, or even around the turn of the century, interest rates at the time were probably higher than they are now. Simply refinancing for exactly the same amount would result in a lower monthly mortgage payment in that case, because the interest rate would be lower. Mortgage rates predictions are that political pressures will keep rates lower than otherwise during the election year.

Quite apart from interest rate movements, though, if you have had your existing mortgage for ten years or so, you will have paid off a portion of hte original loan. That means that if you were to refinance, the actual loan would be for a lower total amount, which would also lead to lower monthly payments in most cases.

And if you have both elements in your favor - you took out your mortgage when interest rates were higher and you have paid down the principal, then you get a "double whammy" effect in lowering the monthly mortgage repayment.

2. Consolidating Debt

If you are carrying balances on credit cards, or you have auto loans and personal loans, the interest in those debts is much higher than the interest on a debt secured by property, such as a mortgage.

Refinancing for debt consolidation - refinancing your home for a higher amount at mortgage interest rates, and paying off those other high-interest debts, can lower your monthly expenses quite noticeably. Of course, you must be careful not to run up the credit cards all over again at that point!

3. Reducing The Amount Of Interest Paid Over The Course Of The Loan

If you are managing your monthly payment comfortably, there may still be benefit in refinancing at a lower rate of interest, but keeping the same monthly payment. This would mean that a higher portion of each month's payment would go towards reducing the loan balance, allowing you to pay it off faster, and therefore lowering the total amount of interest paid over the life of the loan.

These are particularly low-interest times right now, as the government tries to prevent a collapse of the housing market - which means your odds are better than average of finding a new mortgage at a lower interest rate.

4. Repaying The Loan Sooner

Some people just want to get their home paid off as fast as possible. This is a great goal to have, especially if you have a high need for security.

Refinancing, especially at a lower interest rate, can allow you to set a shorter term than the standard 30 years, and pay off your home sooner.

5. Extracting A Lump Sum Of Equity As Cash

A "cash out" refinancing involves refinancing your home for a larger mortgage than your existing mortgage balance. The difference between the new mortgage amount and the old mortgage amount will appear in your bank account as cash.

Some people use these amounts for vacations, or to buy boats, cars, and consumer goods.These are not the smartest uses for the money - remember, you are paying interest on it at mortgage rates!

Good uses for a cash out refinancing, as far as meeting your long term financial goals goes, are paying off higher-interest debt, doing renovations which increase the value of your home, investing, or paying for education to improve your earning capacity.

Marginal uses - those which don't necessarily advance your financial position but may be necessary - are things like paying for college for your kids, paying medical expenses if you are uninsured, or covering your living expenses for a period while you are sick or unemployed.

As you can see, the reasons for refinancing a mortgage can be many and varied. Your needs in each situation would be quite different. The first, and most important, of the steps to refinancing a mortgage is to get clear for yourself what your ultimate aim is for the refinancing.

There is no point dragging yourself and your family through the other steps to refinancing a mortgage if you haven't done the first step properly - you may find that you end up in no better position than when you started.

I will be discussing more of the steps to refinancing a mortgage in later Hubs, but if you want to know sooner than that, you can see a summary overview of the steps to refinancing a mortgage at EmergencyRefinancing.com.

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