Why refinance?

There are a host of reasons why borrowers refinance loans. Refinance usually means paying of your old loan with a new one. There are considerable fees involved, including points, closing costs and other fees. Borrowers must be careful that these fees do not offset the savings gained from refinancing.

First (and most obviously), borrowers refinance loans when market interest rates have gone down. Of course, the rates must have been lowered enough to make the savings worth the trouble of refinancing. Usually, though, even small reductions can translate into significant savings.

It is also common to refinance loans when you want another type of mortgage. For instance, if market interest rates have risen so dramatically and are likely to rise more in the future, a borrower with an adjustable-rate mortgage may want to switch to a fixed-rate mortgage. Conversely, if market rates have been lowered, a borrower might be interested in giving up their mortgage with a fixed rate for one with an adjustable rate. Note that there may be a penalty for switching over and above standard refinancing fees.

Another reason that borrowers refinance loans is to shorten their repayment period. For example, a borrower might originally sign up for a 30-year term because it offers lower monthly payments. Over time, the borrower earns more money and can handle a larger payment. No longer wanting to accumulate the extra interest of the 30-year term, the borrower chooses to refinance.

Finally, a borrower might refinance in order to access the wealth she has accumulated in the house. This basically entails trading home equity for cash. This is probably the most common reason for refinancing.