By Allison Beatty
Refinancing has become a popular means for homeowners who want to lower their mortgage interest rate and take out extra cash for remodeling. Here is how this financial move works.
Mortgage refinancing is a process that involves a lender paying off a homeowner’s current mortgage and replacing it with a new mortgage, usually at a lower interest rate.
This financing move works best when a homeowner’s new interest rate is at least one half of a percent lower than the existing mortgage. This way, savings from the lower rate can quickly overshadow any refinancing fees.
When refinancing a mortgage, many homeowners take the process a step further by also taking out funds for remodeling.
They are tapping into their home’s equity for projects such as replacement windows, new siding and new kitchen appliances. Unlike a home equity loan, however, the refinancing is a new mortgage that replaces the first mortgage.
A homeowner with a $350,000 home that has a $200,000 mortgage balance could borrow from the $150,000 in equity, for example.
If the homeowner wants to borrow $50,000, he or she would refinance and take out a new loan for $250,000. The monthly payment will rise accordingly, based on the size of the loan.
Homeowners also should realize that they are adding to their mortgage balance for the length of the loan term. A local mortgage lender can provide further details.