Mortgage Payment Rigidity and Refinancing Options

July 15th, 2012

Mortgage Payment Rigidity and Refinancing Options

The average American mortgage plan is a 30-year contract with fixed interest rates. The homeowner must pay the same amount each month until the 30 years are up or the debt is paid off.  Many consumers express a sincere desire to get out of debt but often feel hindered by their current mortgage plan.

Fixed rate mortgages can be a benefit to homeowners because it allows them to plan and budget for the long term.  But what happens if life throws a curve ball? The homeowner may get laid off due to company cut backs. Maybe there is an added cost of taking care of older parents. It could be that a divorce is imminent and the home must be sold immediately. Most people have heard stories of people who have suffered such hardships and had to struggle to make ends meet and maybe even foreclose because they could not make their mortgage payments. In these cases, amortization becomes an unpleasant reminder of debt rather than a calculated payment plan over time.

These problems are not easily addressed by the average fixed-rate mortgage, which offers little to no wiggle room or allowances for unforeseen expenses. If a single payment is missed, late charges will accumulate until the difference is paid in full. Falling behind in payment may turn into a domino effect sinking straight into foreclosure and bank ownership.

Refinancing, or debt restructuring, is an option that allows a homeowner to replace an existing debt obligation with a different debt contract under different terms. This restructuring can give the homeowner a chance to take advantage of favorable market conditions, change their payment amount or interest rate, or adapt the loan according to their current circumstances.

There are many reasons to refinance.  Some people seek to refinance their home when circumstances have left them unable to make their monthly payments or when a real estate market has declined to the point that the mortgage is greater than the value of the home itself (this is called being ‘underwater’ or ‘upside down’ on a mortgage).  Another reason to refinance is to take advantage of a better interest rate, which may reduce a monthly payment or the time left on the loan. Sometimes multiple debts may be consolidated into one large loan through refinancing. It is also possible to change the terms of a loan, such as switching from a variable rate to a fixed rate loan or reducing the monthly payment amount.

Refinancing can bring many benefits when it is done right.  However, because there are many options it is important to fully consider the current situation and future predictions of both the home owner and the financial market.


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