Understanding The Basics of Refinancing

Refinancing in a nutshell is obtaining a loan that will pay for the principal and the interest of your current loan. This is done so people can take advantage of lower interest rates than when the loan was first taken out. This will usually add years to the loan but it also saves thousands over the term of the loan, and it lowers the monthly payment. If your refinance doesn’t do two of these main things then there’s really no point in doing it. There are various other reasons for refinancing besides lowering your monthly payment.

There are times when people will refinance their rental properties so they can increase cash flow from that property. Rental properties are only as good as what you receive in return from month to month. So if you are planning on keeping that property and renting it for more than just a few years refinancing might be a good way for increasing your ROI (return on investment).

Some people use their refinance abilities for obtaining more than they need to pay off the original loan, or to get ‘cash out’. When they do that, it enables them to take money out and not need to have a second mortgage. This is known as a ‘home equity line of credit’. This carries a higher rate of interest than do first mortgages.

The money taken out that way may be used for debt consolidation, or home improvement, or whatever they need a lump sum payment on. It seems to be a pretty good idea to up what money you have in your home to work instead of letting it lie there doing nothing, and by lying there you always have the threat of losing it to a swinging real estate market.

Most generally people can look to pay $3,000 for closing costs when refinancing. The good news is that the costs of these loans can be rolled into the loan itself, which increases the loan amount instead of taking money from your pocket. The ‘loan to value’ ratio will generally be 80%. This raises to 85% when taking out an FHA loan. You can expect to pay for mortgage insurance regularly from month to month, so it depends on your plans for the funds when you take them out, but either one of these moves will afford you both upsides and downsides. And now you know the basics of refinancing.