Refinance allows borrowers to repay an existing mortgage prematurely. While a high rate of interest was the push-factor in your case, different people may have different motivation behind the use of refinance. Extending the term of repayment, changing terms of repayment, and changing the type or category of mortgage earlier taken form the several reasons behind refinance decisions.
What differentiates refinance from a premature settlement of mortgage is that borrowers do not have to use their personal resources for making balance payments to the mortgage lender. It is another mortgage lender who makes the repayment.
The new mortgage lender would calculate the balance of the mortgage along with the interest accrued on it. Depending on the lending policy of the original mortgage lender, the borrower will either have to pay some repayment penalty or will qualify for a rebate. The total of these will be the amount of the new mortgage.
Sometimes people draw an amount larger than what is owed as mortgage. Borrowers principally use this to settle their debts. Accordingly, the borrower would draw an amount in excess of the original mortgage. The principal benefit of this method is that borrowers can consolidate their debts at very low rates of interest.
Borrowers who had taken mortgages at the times when the interest rates were very high will be especially interested in refinancing. They will find the presently prevailing cheap rates of interest very attractive. A low rate of interest also influences the monthly instalment that borrower has to pay. Monthly instalment, which is derived after adding a certain interest on the actual mortgage costs, is sure to come down if rates of interest are lower.
While borrowers are very quick in drawing mortgages and loans, they would often think of repaying them as an unnecessary expense. Though they would continue repaying the monthly instalments, it is often out of force. Many borrowers start having palpitations at the thought of mortgage due date approaching fast. Through refinance, these borrowers can extend the payment due date and get more time to plan repayment. The new mortgage pays off the original mortgage and the term extends to the period when the new mortgage is agreed to be amortised.
Another important reason for the use of refinance is to alter the form of mortgage. Many a times people may use specified mortgages instead of the regular mortgages. These are first time buyer mortgage, endowment mortgages etc. As soon as their benefit period ends, they become troublesome for the borrower.
Borrowers always stand a chance to get the best deals in refinance mortgages, with every lender trying to win over them with the attractive terms. However, try distinguish between loan providers who actually have a good product and those who have just window dressed their product to trap borrowers. You certainly do not intend to fall in a new mortgage trap after coming out from one.