Mortgage refinances refer to the replacement of an existing mortgage loan with another mortgage loan. The old loan is paid and closed with the proceeds of the new loan. Moreover, this new mortgage loan also may be used to pay off other liabilities and debts that the borrower has incurred or plans to incur.
Most refinance loans are used for at least one of the following four reasons:
- Better interest rates. When current interest rates are much lower than the rate on the borrower's original mortgage loan, a refinance would be a wise financial investment for the borrower.
- Change of term. The term is the life of the loan and relates to the amortization of the loan. The longer the term and amortization, the smaller the monthly payments. However, shorter terms and amortization save money in the long run and build equity faster.
- Consolidation of debt. Refinance loans are often used to consolidate several long-term liabilities. Credit cards charge exorbitant rates, and many installment loans are not much better. A consolidation refinance loan rolls these debts into one mortgage loan with lower and tax-deductible interest-rates.
- Extra cash. The mortgage refinance is also a good way to raise extra cash for special purposes, such as sending a child to college, financing a special vacation or investing in a new business.
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