There are a number of reasons which influence people to consider refinancing their mortgages. Many homeowners are barely coping with their mortgage payments, finding their budgets stretched to the limit, and hope that by refinancing they can reduce this monthly burden. Others simply find it makes economic sense to move from a higher interest rate to a lower one and refinance and reduce their mortgage term at the same time, thus reducing the total amount of interest repaid on their loans. Some want to release equity into cash, to consolidate debt or to spend on vacations or home improvements.
There are different considerations which need to be given due thought to in each of these differing scenarios. Those who are presuming that refinancing is the best option to make their budget stretch further or alleviate financial hardship should consider other options before refinancing. The costs of refinancing are high, and if the borrower has other debts then they are unlikely to secure the lowest interest rate as the debts will be reflected in their credit score.
A more viable option is to consider loan modification, which can be done in a variety of ways. If the financial problems are likely to be short term then a good choice is to ask the lender for a payment holiday for several months, thus putting the mortgage payments on hold. The accumulated missed payments are then added to the balance of the mortgage and paid off by extending the mortgage. This is a less costly option than refinancing and will give temporary relief when most needed.
Another option is to simply ask the current lender to reduce the interest rate without refinancing. They may well say no, but there is nothing lost by requesting this. Borrowers can ask the lender to extend the term of the loan which will reduce the monthly payments, but will mean that more interest is paid back in the long term. Each of these options allows the borrower to over pay the mortgage when finances improve and thus counteract the effect of the additional accrued interest.
Those who look to refinance to release equity should really give very careful consideration to this, particularly if it is used as a way to consolidate unsecured debt. It is never a good idea to borrow against the home equity to pay off debt, as it puts the home at greater risk. Other options to consider are reducing debt through careful use of balance transfer cards, or even an unsecured loan.
Those who want the cash from their equity for spending power should reconsider as the actual costs make this method of borrowing extremely costly. This should really only be considered for the type of home improvements which will give a greater return in the property value than the total costs of borrowing by this method. A better option is for the mortgage holder to save up for their additional spending needs instead of increasing their debt.
Mortgage holders who wish to secure a lower interest rate, have good credit and a high proportion of equity, are those who will benefit from refinancing their mortgage. However the actual costs of refinancing should be considered so that the borrower can calculate at what point the refinancing has turned the transaction into an actual saving. Refinancing is likely to be the best option for those not planning to move in the next several years; who have good credit; and who can secure a lower rate which will effectively pay for itself in a set period of time. This can be determined by using an online mortgage calculator.
As you can see refinancing should not be the automatic first choice in some situations, and it pays to give careful consideration to other options before plunging in to refinance. It is worth remembering that it may not actually be an option anyway as mortgage lenders have tightened their lending practices and are less willing to commit to new financing.