Mortgage Refinance

Over the past several years, with fixed home mortgage rates being at the lowest ever, many homeowners have taken the route of refinancing their home to help reduce various debts while lowering their monthly mortgage payment. Is the practice of using the equity in your home and taken out larger mortgage loans a good idea for homeowners?

Before a homeowner decides to go this route they should first take a look at their personal finances and outstanding debts. This would be their credit card bills, car loans and any other installment loans they may have. Usually when it comes to credit card bills and credit card companies they usually have a high interest rate that can be anywhere from 10 to 20% interest on purchases and cash advances. By refinancing your home at a fixed rate of 6.50% for example, a homeowner has reduced the amount of interest they would have to pay by over half. As far as car loans and installment loans a homeowner would have to consider the interest rate comparison of the loans to see if it would be advantageous or not to pay them off. Banks and mortgage lenders may have a homeowner pay off these loans whether or not the homeowner had requested to pay them off. The reasoning for this would be because if the homeowner is refinancing at a larger dollar amount, then the homeowners income to credit obligations ratio would increase, therefore making it more risky for a bank or mortgage company to lend out a loan.

When a homeowner is looking to refinance their home they should compare the amount of their existing mortgage they need to pay off with the estimated value of their home and the amount of equity that they have. Most banks and lenders will due a mortgage refinance at 90% loan to value. For example, if you think your home is worth $200,000, then the maximum amount that you would be able to borrow is $180,000, which would be 90% of $200,000. Now, let's say that you have approximately $125,000 left to be paid on your existing mortgage. This would result in approximately $55,000 of equity that you would have in your home that you would be able loan against. The $55,000 is calculated by taking $180,000 - $125,000.

Other advantages of absorbing your credit card bills and loan payments into your mortgage by route of mortgage refinance are the tax benefits that would go with owning a home. Mortgage payments are made up of principal and interest. The interest paid in your payment is considered tax deductable when you itemize you income taxes at the end of the year. Along with the tax advantageous would also be the convenience of reducing the amount of bills paid per month. By consolidating your bills, a homeowner would have to make only one payment per month for their mortgage versus having to make several. A mortgage refinance can defiantly reduce a homeowner's debt burden by using the equity in their home to pay of other debts.