Mortgage refinancing is something that most people these days are familiar with. It is now fairly common to refinance a mortgage; at least it used to be. Up until a few years ago it was very easy to refinance but the current economic issues have made banks far less willing to refinance mortgages than they used to be.
Mortgage refinancing is a fairly simple thing; all you are doing is taking out a new mortgage on your house. You would then use the money from your new mortgage in order to pay off the existing one. There are basically three reasons that you would do this. The first of these is to reduce the amount of interest that you have to pay. A mortgage is very long loan so the interest will be more than the amount that you borrowed. If you can get a lower interest rate you will save a considerable amount of money over the length of the mortgage. The most common reason that you would get a lower interest rate is that your credit has improved since you initially took the mortgage.
There is another way that you can save money on interest by refinancing and that is by reducing the length of the mortgage. If you are now earning more than you were when you first took the mortgage you can probably afford to pay more each month. Doing this would allow you to trade in your thirty year mortgage for a fifteen year mortgage. Doing this would more than cut the interest that you have to pay in half resulting in savings that may well be into the hundreds of thousands of dollars.
The second reason that people refinance their mortgage is to reduce the amount that they have to pay each month. If you can get a lower interest rate this will reduce that amount that you have to pay by a small amount. If you need to reduce it even further you are going to have to extend the length of the mortgage. This will significantly increase the total amount of interest that you have to pay but it will also leave you with smaller monthly payments.
The last reason that you may want to refinance a mortgage is so that you can turn the equity that you have in your house into cash. This is probably the most common reason that people refinance but it may not be the wisest decision. In some cases it makes sense for example if you are using the money to pay off your credit cards. However most people will use the money to pay for something that they shouldn't be borrowing money for and certainly not putting their house on the line. Rarely is it a good idea to turn your equity into cash unless you will be using that money for something that will increase your net worth.