Mortgage Dictionary -> Refinancing
You took out a mortgage for your current home 10 years ago at an interest rate of 8%. Now 10 years later, most mortgages have interest rates of 5 or 6%. You're jealous of the people today who get this reduced rate and thus save money on mortgage payments every month. Be jealous no more: you, too, can get this lower mortgage rate, and it's actually rather simple: just refinance your current mortgage.
How Refinancing Works?
In a nutshell, refinancing is taking out a fresh loan to pay off an existing loan. This new loan has a lower interest rate and typically also has lower monthly payments. When you refinance, you are no longer making mortgage payments to the company which you had the original mortgage with; rather, you are now legally responsible to the new company which you've refinance with.
Three Reasons Why to Refinance
If you're still not sold on the benefits of refinancing, it's time to consider three solid reasons why to refinance.
1. Lower Interest Rate. No one likes throwing money away, and when you're paying a high interest rate, that's exactly what you're doing. You're throwing away money to the lender, when you could be saving money by refinancing. Refinancing results in a lower interest rate, which means less extra money that you're paying to the lender.
2. Paying Off the Mortgage Quicker. If you're nearing retirement and don't want to be making mortgage payments til you're 90, refinancing can help you to pay the mortgage off sooner. That's because you'll be paying far less in interest every month, which means more of your money goes to pay off the principal of the loan. Refinancing can literally scrape years off your mortgage.
3. Can Consolidate Your Debt. Some lenders who offer refinancing give you the option of wrapping in all your other debt into your refinanced mortgage loan, so that you're only making one monthly payment for everything. This can help you to pay off your existing debt and thus boost your credit score.