Options Available when Refinancing a Mortgage
When refinancing a mortgage through the same financial institute, you may not
have too many choices in what you decide. For example, if interest rates have
decreased, hopefully, you will see the benefit of the savings but if rates have
increased, you may be responsible for larger payments. There are, however, other
options available depending on your present situation and future goals.
Normally when it is time to refinance a mortgage, you are able to apply funds to
the mortgage reducing the amount borrowed. If you have saved some extra money,
received a bonus at work, or you have received some other monetary disbursement,
then you would have one of two options:
- Take the funds and apply to the total loan, reduce your monthly payments and leave the length of the mortgage the same. You would save interest on the extra funds and free up a little money during the month to do other things but your amortization period would remain the same.
- The other option is to apply the funds to the total, leaving the payments the same amount so that the amortization period is smaller, thus paying off the mortgage faster.
Both of the options do assume a similar interest rate. If the rate has
increased by several points, calculate both scenarios in order to determine
which provides the best savings.
Moreover, when refinancing a mortgage, this is the time to take out some equity
if you would like to make some renovations to the property, pay for a child's
education or go on vacation. In this scenario, you would actually borrow more
than you presently owe on the mortgage, borrowing against the value of the home.
Your monthly payments may be higher or the amortization period may be lengthened
to accommodate the extra loan.
Further, when refinancing and removing some equity, the financial institutes are
not the only lenders open to you. You may approach a mortgage broker or even
more than one broker to find a private lender in the event that you do not
qualify for taking out a larger mortgage. There are many wealthy individuals who
are willing to lend seventy-five to one hundred percent of the home's value.
Because private lenders make their profit from the risk they incur, they are
more than happy to finance individuals who either cannot or will not deal with
the banks.
And if you need to keep the payments small, they may write the payment schedule
agreement with interest payments only. Of course, this does not help to build
more equity in the home but it may be a temporary situation to allow you to do
what you need to do at the time.
Lastly, when refinancing a mortgage and looking to remove equity, do not stop at
the first "no" you receive. Keep looking and asking because there are plenty of
options available. You have to persevere until you find the right one for you.
Also make sure to read "Refinancing
mortgages, whom to talk to?" on
Bill's Mortgage Page.