Types and Benefits of Mortgage Refinancing

What are the different types and benefits of mortgage refinancing?

If you are paying a high interest mortgage or unable to make your monthly home loan payments on time, you can consider refinancing. Mortgage refinance implies replacing your existing home loan with another loan offering a lower interest rate using the same property as collateral.

The Benefits of Refinancing

You can benefit in the following ways by obtaining a mortgage refinance loan:

  • Pay off your high interest loan: The rate of interest on refinance loans are lower that that of other mortgages. So, you will be able to pay off your high-interest home loan and replace it with a loan at a lower interest rate.
  • Eliminate private mortgage insurance (PMI): You can get rid of your PMI by paying down 80 percent of the original loan amount with the help of the new home loan.

The Different Types of Refinancing Options Available

You can refinance by obtaining the following types of loans:

  • Fixed-rate loan: The interest rate remains the same throughout the term of fixed-rate loan. It is always better to refinance with this type of loan when interest rates are low. The fixed monthly payments help you to handle your finances effectively.
  • Adjustable-rate loan: This type of loan offers a fixed interest rate for a set amount of years and then the rate keeps on changing through out the term of the loan. The interest rate changes in line with fluctuation in market rates. Hence obtaining an adjustable-rate loan for refinancing may not be a wise decision. However, if you intend to live in the house only for a few years, you can consider obtaining this mortgage refinance loan.
  • Cash-Out refinance: You can obtain a larger mortgage that will enable you not only to pay off your current mortgage but also other debts. You can also use the extra money to pay your insurance premiums, credit card payments and to make improvements to your home. Before going for mortgage refinance, you must verify from your present lender if you have to pay a prepayment penalty. You can use a refinance calculator to determine how much the new loan will lower your home loan cost.