Mortgage Refinance Information

A mortgage refinance is when a consumer or business refinances an existing mortgage loan to either obtain a lower interest rate, different payment terms, to take equity out of the property, or to extend the length of the loan. During the last decade home refinancing has been an extremely common method for consumers to change their monthly payment obligations by taking advantage of historically low costs of borrowing money. This has led to major growth in the mortgage loan origination industry as banks and non-financial lenders have competed to underwrite the greatest share of mortgages.

By far the most common reason for a consumer to consider refinancing is to obtain a lower interest rate on their existing mortgage loan. For example, a person buying a home in 1991, with normal credit would have obtained an interest rate of roughly 9%. The original monthly payment on their mortgage would have been $1,609.25. Ten years later, with 20 years to go on their loan that same person could have refinanced their mortgage when rates were at historic lows and if they changed nothing but their interest rate (that is if they took out no equity in the refinancing and refinanced into a 20 year loan), at a 5.75% interest rate their new monthly payment would be $1,167.15 a $442.10 per month savings in cashflow.

A second major reason for mortgage refinancing is to change the payment terms of one’s present mortgage. This typically occurs when dealing with a non-conventional (not to be confused with non-conforming, which is a credit term) mortgage loan. In the present environment many lenders are comfortable writing interest only loans or loans with balloon payments. In many circumstances such loans are not intended to last more than 5-10 years and are expected to be satisfied through a subsequent refinancing of the property. These type of loans essentially require the consumer to either have some sort of financial windfall near the end of their mortgage, not really need the mortgage, or to refinance at the end of the mortgage loan.

The second largest reason for mortgage refinancing is to take out equity (also called ‘cash back at closing’ or 'cash out') from one’s home. Such refinance mortgages have been incredibly popular in the low interest rate environment of the last 15 years as low mortgage interest rates have spurred both the economy and real estate prices into a long term growth spurt thus causing many people to have previously unimaginable amounts of equity in their homes. American consumers have found these types of arrangements useful for debt consolidation, funding college expenses, funding retirement (reverse mortgages), home improvement financing, and other major expenses.

Finally, the last major reason Americans choose to do a mortgage refinance is to extend the length of their home loan. Over the last decade many consumers have found themselves approaching the end of their mortgage loan and rather than enjoying a life free from a mortgage payment many have chosen to refinance to take out cash and then extend the life of their mortgage over future years. While this was generally a side effect of the previous reason in some cases (such as individuals starting businesses funded largely out of their home equity), this is actually a legitimate tax and financial planning strategy.