| | | | Why Do People Refinance Their Mortgage? |
By Angela Baca
In the depressed housing market of 2007, refinancing is on the minds of homeowners who are afraid of losing their homes because their mortgage payment has become impossible. This article offers readers several reasons why homeowners consider the financial strategy of refinancing their home loan.
The HUD Office of Policy Development and Research published a study in November 2004 entitled “An Analysis of Mortgage Refinancing, 2001-2003.” This document contains relevant findings that can help to explain the refinancing situation in the United States.
According to HUD, “The main factor driving households’ decision to refinance is the difference between the interest rate on their current mortgages and the interest rate they could obtain by refinancing.”
Now the housing market has changed, and people may be refinancing for a higher interest rate than they obtained only a few years ago. The key is that refinancing allows homeowners to tap into equity, or the increased market value of their house compared to the price for which they purchased their home. People refinance their homes for different reasons. These reasons are not presented in any order. The first reason is that the cash they can get back from their new loan can be used to pay off other debts. Home loans carry lower interest rates than many other types of debt. Cash from a refinanced loan can be used to pay off high-interest credit cards, student loans, automobiles, and other debts. The second reason that people refinance is to obtain funds for home improvement. Home equity can create cash for building a new roof, installing a pool, adding a room, and a multitude of other improvements that increase the value of the home.
The third reason that people refinance is because their financial situation has changed. They may need the extra cash because a spouse has become disabled or become unable to work for another reason. The fourth reason that people refinance is to pay for their child’s college education. Some homeowners feel that the expensive cost of a higher education is better paid up front. If they don’t want their child to be burdened with excessive loans after graduation, they use the equity in their home to assume the financial burden for the education. Then they pay it back slowly with a low interest rate, and the loan is secured against the value of their property.
There are many other reasons to refinance. This financial strategy is one of the major ways that working people with little savings can get a hold of a large sum of cash for their own uses.
Refinancing a home is a serious decision. The bottom line comes down to whether you are happy with your current mortgage and if you can get the cash you need for your unique needs. Seek help from a mortgage broker, a credit counselor, a loan officer, or another housing professional before refinancing. This decision should be made only if it is the best option for your financial situation.
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Pros and Cons of an Interest Only MortgageAnnual Percentage Rate or APR ExplainedFour Good Reasons to Refinance and Three Reasons Not to Refinance
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