Effects of Refinancing

• When taking out a home loan, homeowners agree to pay back the principal amount borrowed plus whatever interest rate the lender charges for borrowing the principal amount. The rate of interest depends on current market rates. The duration of the loan, or loan term, also affects the interest rate amount. In effect, refinancing a home loan restructures the terms of the loan, meaning borrowers end up paying a different interest rate based on a new time period in which to payoff the loan.
  
  

Lower Payments

• The duration of a home loan can have a significant effect on the minimum monthly payment amount. Homeowners wanting to lower their monthly mortgage payment can opt to refinance as a way of extending the payoff period. By extending the payoff period, homeowners can pay smaller monthly payments under the terms of the new home loan. And while extending the loan duration can help reduce the monthly payment, borrowers must also pay closing costs when refinancing a home loan. Since these costs are paid upfront, only homeowners who plan to remain in their homes for a while will recoup this out-of-pocket expense.
  
  

Debt Consolidation

• Homeowners looking to consolidate debt can use a home loan refinance to combine multiple debts into one payment. In cases where a second mortgage exists on a home, homeowners can combine both mortgages into a single home loan. A home loan refinance can also help with paying off other types of debt, such as credit cards and car loans. This option is called a cash-out refinancing, where the new loan amount exceeds the actual value of the home. Homeowners can take the excess amount out in cash and use it to pay off other bills.
  
  

Fixed Interest Rates

• High interest rate charges can significantly raise the total loan amount for a home, especially when spread over a 30-year period. Certain types of mortgage loans, such as adjustable-rate or interest-only loans, can place a homeowner in a financially strapped position when interest rates start to climb (in the case of adjustable-rate loans), or principal payment amounts become due (in the case of interest-only loans). Homeowners can refinance as a way to lock in a fixed interest rate on their home loan. With adjustable-rate mortgages, market rates provide a good indication of whether refinancing will help reduce overall cost. If market interest rates are expected to rise, a loan refinance can help homeowners lock in a fixed rate and avoid increasing interest costs.