Mortgage Refinance Explained

Interest rates over the past several years have dropped to almost half of what the were in the mid-90's. Back then if you had an interest rate of 7.5%, you where considered lucky. Non conforming interest rates where above 10%. Today even with damaged credit, you can get a rate better than a conforming interest rate was several years ago.

This drop in rates has ignited a flood of people looking to refinance their mortgage not seen before in the mortgage industry. The increase in home values in such areas as California have given people an outlet to borrow against their homes with a great rate.

One of the biggest questions is "Should I Refinance?". The answer is completely up to you. What might be good for your neighbor may not be the best idea for you. There are many different reasons why people refinance their existing mortgage. The most common being: Get cash back, reduce their interest rate, consolidate debt or to change the type of loan they are currently in. Lets look at some of these examples in detail.



1. Cash out Refinance:
Jim owns a home that was appraised at $250,000. Hew wants to take out $50,000 in order to start a business. Since Jim's credit is a little damaged the mortgage company will allow him to borrow up to 80% of the value of the home or LTV.

.80 x 250000 = 200000

The mortgage company will allow him to have a $200,000 mortgage of which he must pay off his current mortgage and pay closing cost.

Current mortgage $147,000.00

Est. Closing Cost 3,000.00

Cash Out to Jim 50,000.00

Total new loan $200,000.00



2. Refinance for a lower rate

Mary has had a fixed rate mortgage for the past 15 years. She wants to take advantage of a lower rate which is now available. Her current mortgage balance is $100,000 with a rate of 9.125%. The current rate Mary qualifies for is 5.5%. Her current payment for just principal and interest is $1650 a month. Based on a $200,000.00 loan taken out 15 years ago.



$100,000.00 @ 5.5% for 15 years = $817.00!



This is based on a 15 year mortgage, so Mary did not add any time to her mortgage term. She saved almost half.