Refinancing Mortgages

Unlike almost all other secured loans, mortgages are eligible for refinancing. Refinancing means that the existing mortgage is paid and replaced with a new one, usually with different terms and a new interest rate.

The main reason people refinance mortgages is to reduce costs. They usually do this by securing a new, lower interest rate or increasing the length of the mortgage contract.

For example, if a person with a $200,000 mortgage who was paying a 5% interest rate refinanced to a 4% interest rate, he or she could save $100 per mortgage payment. Not surprisingly, many people will refinance their mortgages when interest rates fall.

Refinancing and Equity

Since mortgages are secured loans, the terms and costs of refinancing will usually be determined by the amount of equity in the property involved. Equity is the difference between the value of a property and the amount of the mortgage.

If there is a lot of equity available in a property, refinancing can substantially reduce mortgage costs . If no equity is available, it is often not possible to refinance a property. There are some specialized arrangements that can help a homeowner refinance a home in which no equity is available.

Refinancing and Non-Recourse Lending

Many homeowners have been unable to refinance in recent years because of the drop in property values. The falling property values have destroyed the equity in many properties.

The property owners cannot refinance because the amount of their mortgage exceeds the value of their home. This condition is termed "underwater" in mortgage slang, and it is one of the dangers of secured loans. If the value of the collateral drops, it can be impossible to generate enough funds to pay off the loan through the sale of the collateral.

In states without non-recourse laws, this situation can seriously harm borrowers because they will be liable for the full costs of mortgages even if the property undergoes foreclosure. In states with non-recourse laws, it is illegal for lenders to try to collect unpaid mortgage payments after foreclosure.

Remedies for Mortgage Problems

The federal government and mortgage lenders have been trying to develop remedies for homes that are "underwater." The Federal Housing Administration has tried to make refinancing available to homeowners with houses that are "underwater."

These fixes usually involve efforts to lower mortgage payments to a level that the owner can afford. Some of these efforts have failed because of high unemployment and other costs. Media reports indicate that these efforts have not been very successful.

The mortgage or foreclosure crisis has led to some changes in secured loans on real estate. Some lenders have stopped issuing home equity loans while others have tightened the rules for mortgages.

Despite the mortgage crisis, interest rates are still at record lows, making refinancing a very good deal for many homeowners.

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