Mortgage Refinance Definition

Refinancing a home mortgage is the act of replacing a current debt obligation with a new debt obligation under different terms.  The main purpose of home refinancing is to lower the monthly payments through the securitization of lower financing terms.  Other reasons for refinancing a home mortgage are to consolidate debt by rolling debt into a single lower interest payment.  Persons who own homes with equity and are carrying high interest rate debt such as credit cards and personal loans may choose refinancing to consolidate debt into a single lower payment.   Another popular motivation people have in refinancing their home mortgage is to move from a variable rate  mortgage to a secure fixed rate mortgage at a lower rate.  When fixed rate interest rates on home loans drop dramatically, it only makes sense for the consumer to lock in a fixed rate by refinancing.  When a person refinances a home loan often times a dual or multi purpose action can be achieved.  Such actions include eliminating consumer debt, taking out a fixed dollar amount to pay for a home improvement, college education or even to start a small business.

In addition to the benefits of lowering monthly payments, persons who refinance can take advantage of special tax incentives that make refinancing all the more compelling.  Some of the tax advantages include a full deduction for the mortgage interest paid.  Also, borrowers can fully amortize the points related to the home acquisition part of the mortgage over the entire life of the loan.

The two most common drawbacks in refinancing a home loan are the points paid to the lender and potential penalties.  The most common refinance penalty is a set penalty fee for an early loan payoff.   Points are simply a percentage of the entire amount of the refinanced loan to be paid upfront. A 2 point fee on a $300,000 refinanced loan would be 2% of $300,000 and thus the borrower would incur upfront loan costs of $6,000 plus any other additional fees imposed by the lender such as an origination fee, application fee and processing fee.

Many borrowers in today’s marketplace look for no closing cost refinance loans.  A no closing costs refi makes sense especially if the market interest rate is at least 1.5% lower than the borrowers current home loan rate.
Borrowers should look carefully at all of their loan options and make decisions based on the best available choice for their specific needs.