How Mortgage Refinancing Can Help You

The mortgage industry in the United States has taken a beating since the beginning of the housing bust in 2007. Despite efforts by the federal government to keep the housing market afloat, as soon as the homebuyer tax credit expired in April 2010, the market resumed a downward course. Housing prices fell by 3% in May alone. Home prices are expected to be down even more once the data for June is released.

As the aftershock from the subprime mortgage meltdown continues to worsen into what looks like a depression, many homeowners are worried about staying in their homes. Fortunately, since the interest rates on mortgage loans are so low, many people have taken the opportunity to refinance their loans even as the housing market experiences the worst downturn since the Great Depression.

Refinancing a mortgage saves the borrower interest costs over the term of the loan. Mortgage refinancing can even get the borrower a shorter loan term. This may seem like bad news, because a shorter loan term translates to a higher monthly payment, but the extra savings in interest payments more than makes up for it. When a borrower refinances, their old mortgage is canceled and subsumed into a new loan. The point is that the new loan is hopefully more favorable to the borrower than the old loan.

Mortgage refinancing allows the borrower to get more favorable terms, but only if the conditions are right. For example, if the borrower is several years into their mortgage, it may not be wise to refinance. This is due to amortization - the amount of the payment credited to the interest is high relative to the amount credited to the principal for the first ten years or so. After this period, if the borrower refinances, the amortization schedule will be reset, which will end up costing them more in interest payments. In effect, they have to pay their original interest payments all over again.

Thus, refinancing a mortgage is not a golden ticket to lower payments. Borrowers have to think about the consequences of refinancing before they speak to their lender about what terms are available.