How Does Refinancing Work?

How does refinancing work? Refinancing property involves obtaining a new mortgage loan at better terms (hopefully) than your existing mortgage loan, and then paying off your existing loan with the new loan.

This means that the term of your loan will change. If you have an existing 25 year home loan and it only has 12 years left on it, then when you refinance, you will have a completely new mortgage of whatever term you have negotiated (10 years, 15 years, 25 years, etc).

Refinancing can benefit you if

1. You are able to negotiate a better interest rate.
2. You are able to negotiate a new loan with a much longer term than the number of years that remain on your current mortgage. This means you will effectively be reducing your monthly repayments.
3. You are paying a fixed rate mortgage but the market interest rate has dropped. You can negotiate a new mortgage with a lower interest rate than your current fixed rate.
4. If the current prevailing interest rates are low but predicted to go up, and your mortgage is a flexible rate mortgage, you can shop around and look for a fixed rate mortgage that will prevent you from being placed under financial pressure if and when the market interest rates do go up.
5. Your financial situation is better now than when you took out the loan, you can probably get a new loan with better terms and conditions and a better interest rate.

Try this free refinance calculator to see whether or not refinancing is going to save you money every month.

There are some questions you need to ask when refinancing a house. Typically these should be on the subject of the overall costs of refinancing, as how refinancing works in practice, is that there are fees that you will pay for cancelling an existing mortgage and all the setup of costs of your new refinance loan.

You need to do the math when shopping around for the lowest refinancing mortgage rate to see whether the refinancing cost incurred by switching your mortgage is going to amount to more than the saving you will make from switching. The best refinancing rates are no good to you if they are offset by high costs.

In a nutshell, this is a good summary of the answer to the question "How does refinancing work?" Keep these points in mind when evaluating whether refinancing is for you. You don't need much more information that supplied here to reach a decision.

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