What is refinancing?

Mark DiMercurio | August 20th, 2015

Buying a home is quite expensive especially because the cost of real estate properties such as homes has been noted to be increasing at a very steady rate. This has necessitated the need to identify other ways of being able to   raise the money needed in buying a home. The easiest way of raising this huge amount of money is through the use of financial plans such as loans. Mortgage loans are specifically very common as far as the purchase of real estate properties is concerned. These are basically huge loans that come with an entirely long repayment period that may stretch up to 25 years and more.

What is refinancing? Refinancing is a very unique concept and strategy that is used in paying off an already existing loan using a new loan. It is basically applying for a new loan to repay an old loan and in turn be left with the new loan to service. This is usually very important especially in cases where the repayment period of the already existing loan is approaching while it has not been fully cleared. It is important to note that in real estate, when a mortgage is not cleared within the specified time frame, foreclosure takes place. Foreclosure is a situation whereby the borrower losses ownership and other rights of the home to the lender. Therefore, refinancing is undertaken so as to avert foreclosure from materializing.

Refinancing is just like any other loan application whereby the borrower is required to provide a tangible asset to cover the loan. In this case, the borrower uses the home (for which the mortgage is been cleared) as collateral. The property therefore acts as the loan’s security and all title deeds are kept under the custodian of the lender.

There are different reasons and factors that may necessitate the need to refinance. Some of the reasons are such as the need to reduce the repayment period of a mortgage. This is entirely the case when mortgage repayment periods stretch to over 20 years. The borrower may intend to reduce this repayment period by borrowing another loan that may have a repayment period of about 5-10 years. Refinancing may also be done when there is need to change the mortgage type from a fixed rate mortgage to an adjustable one.

Despite the fact that refinancing is usually a great strategy, it may not always be the best option. This is specifically the case when there are prepayment fees that are attached to the already existing mortgage. This is due to the fact that when this is the case, the borrower ends up paying more for the refinancing. It is therefore not economically viable to opt for refinancing in such a case.

In order to distinguish whether refinancing is economically friendly, there is need to calculate the total cost to be incurred for refinancing and the savings in form of interest that the borrower is to get. When the savings are higher than the cost of refinancing, it is advisable to resort to using this strategy. However when the case is the reverse, opting for refinancing will ultimately turn out to be quite expensive to the borrower.

If you live in Brentwood, Discovery Bay, Oakley, Antioch, Pleasant Hill, Concord, San Ramon, Tracy, Walnut Creek, Danville or any part of Contra Costa and Alameda County give Delta Lending a call to help you refinance your property.