Refinancing Your Mortgage in the US

by admin on June 1, 2011

If you are like tens of thousands of homeowners in the United States, you are considering refinancing your mortgage, which is also known as taking out a second mortgage. Refinancing means replacing your current debt with one under different terms. Mortgage refinancing has always been the most common consumer refinancing, and this is true especially now in the wake of the global downturn. If you are suffering from financial difficulties, mortgage refinancing is also known as restructuring one’s debt. You may have a serious problem, and this is why you have decided to refinance, or maybe you are not in financial distress (yet), but you are hoping to save money by getting a second mortgage. There are many other reasons to refinance a loan besides being unable to meet your monthly payments. These include benefiting from a better interest rate, which will lead to a reduced loan term or monthly payment. Reducing the monthly payment will result in a longer term (of course), and you may end up paying more. If you want to consolidate your debt – roll all of your obligations into one – this will also result in a longer term. Saving money with freeing up cash will also cause you to pay off your loan for a longer period of time. Finally, you may feel that your current mortgage terms carry too great a risk for you. If this is the case, you may decide to replace the variable-rate loan with a fixed-rate one.

Struggling with financial distress is usually the core motivation regardless of the specific steps you choose to take. The penalty for reducing monthly payments is the longer term and with that ultimately, you owe the bank more than before you refinanced.

In the US, you can sometimes benefit from tax advantages on refinancing, especially if you are not being charged Alternative Minimum Tax. This tax is levied by the federal government on trusts, corporations, estates, and individuals. It is part of the US income tax, with taxpayers being allowed a flat exemption but not standard deduction or personal exemption.

If you decide to refinance your mortgage, there are certain aspects you have to watch out for. For instance, you may be offered better terms if you pay off a fixed-term loan early. At first glance, you are likely to get enthusiastic about the savings you will generate this way. On second thought, you should not be, because a large number of these loans entail penalty clauses for early repayment and the so-called closing fees to top it off. What is more, the refinancing also entails transaction fees. You should calculate all possible fees before you set off to refinance, because they may cancel out your prospective savings.

Remember that to get a low rate, you will need a FICO score of at least 720. You may want to request your credit report before applying for refinancing as to avoid unpleasant surprises. You can order a free copy of your report online once a year. Once you obtain your credit report, check if it shows missed payments. If it does, you will need to convince lenders that you changed your borrowing behavior by making timely payments. That will take some time. If the report just shows a large credit card balance, you can correct that with ease. Pay it off to raise your score.

An important part of the decision is figuring out the actual costs of refinancing. This involves initial fees, ongoing costs, unplanned costs, closing costs, variable costs, and all others. As you can see, the decision to refinance your mortgage is not one that should be made on a whim.

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