In today harsh and unpredictable economic environment more and more people withdraw equity from their properties to pay down debt, cover unexpected expenses, and resolve other financial problems.

Mortgage Refinance [http://www.cicaconsulting.com] means that a new financing is arranged for the given property.

Sometimes it is performed because a more favorable mortgage lender has been found and the interest rate and conditions of the new loan are better for the owner. However, for the most part people refinance their properties because of some inconvenience, such as debt. In which case they obtain a new mortgage, a higher loan to value ratio, and pull out certain sum of money from the available equity.
Although mortgage refinancing can be a good option to get rid of debt, many factors have to be considered before making the decision:

1.The total expenses associated with the refinance have to be estimated. i.e. lawyers fee, property appraisal fee, previous mortgage cancellation penalty, likelihood of being forced to buy mortgage insurance etc.

2.When all these expenses are added together, what percentage of the debt can be actually paid off with the money that has to be spent on the fees. Sometimes 5,000 needs to be spend to refinance, and only to get 20,000 to pay off the debt.

3.The long term plan needs to be drawn up, usually 12 month is enough,and the cost benefits / drawbacks,the interest rates,and all the fees involved in the transaction have to be compared. It is very easy to be misled into thinking that 10% difference in the interest will save you money.(in many situations it will, but if the debt can be paid off in one year, it is not beneficial to spend time and money to refinance and by the time its all settled realize 500 dollar savings.)

For Example:

Credit Card Debt of$10,000 at 15% annually =$1,500 in interest per year
The debtor owns a property that is valued $ 100,000
The mortgage is $ 75,000 and therefore equity of $ 25,000
The current mortgage rates are 4.5% and the regulations allow for 90% loan to value lending.
The debtor decides to withdraw $ 10,000 from the equity (at 4.5%) to cover the $ 10,000 debt ( 15%)
Although there is a 1,500 - 450 = $ 1050 saving in the interest by the end of the year the debtor has to spend: $ 600 on appraisal, $ 1500 as a penalty to break the current mortgage agreement, and because the new mortgage will be 90% loan to value the regulations require mortgage insurance of 3% - $ 2500(usually broken into installment and taken out with mortgage payments for 60 months)
In reality the total refinance cost is 600+1500+2500= $4600. So the $ 1050 interest savings is just an illusion.

Home Refinancing is suitable for the individuals who have a lot of outstanding debt that will take a long time to pay off.
In such cases the debtors can save a lot of money on the interest payments (assuming the new mortgage rate is lower than the current debt interest) as well as keep a good standing with their creditors and maintain strong credit score.

There are other options available such as secured line of credit, debt consolidation loan secured by the property,as well as others. We will address these in the future posts.

We hope that this article has been informative. We cant stress enough - calculate all the costs, and if struggling, find a qualified professional to advise on the best decision.

This article was written for general educational purposes. It does not constitute legal advice of any kind. We do not provide any guarantee for the content, as the regulations change quite frequently. Please contact us directly or consult a qualified agency for legal advise.

Your Debt Management Consultants,

CICA Team

Home Refinancing [http://www.cicaconsulting.com/home-refinancing]