Refinancing 101

Refinancing is the process of replacing your original mortgage with a new mortgage that has a more favorable interest rate and term. Many people choose to refinance when they have home equity (the difference between the amount owed to the mortgage company and the home's value). In other words, refinancing is paying off an existing loan with the proceeds from a new loan. Refinancing lenders typically require a percentage of the total loan amount, in the form of "points," as an upfront payment. One point equals 1 percent of the total loan amount. The more points, the better, because a larger payment upfront results in a lower interest rate.

Pros
Refinancing can reduce monthly payments and interest rates, and allow people to choose a different mortgage company or take cash out of their home preceding a large purchase. Homeowners can also cancel their private mortgage insurance (PMI) with a mortgage refinance loan, as the home's value increases and the balance on the home declines. Some people refinance to switch between an adjustable rate mortgage and a fixed one. For those with balloon programs such as ARMs, refinancing allows someone to switch to a new, fixed rate before the entire mortgage balance is due at the end of the term (usually five to seven years). One other reason for refinancing is to consolidate other debts into one loan.

Cons
However, there are risks involved. People may incur penalties that can amount to $1000+ for paying down their existing mortgage with home equity credit. Make sure you have an understanding of the fees involved before committing to refinancing. Fees can account for 3-6 percent of your outstanding principal and include the application fee, title insurance and title search, the lender's attorney review fees, homeowner's insurance, the appraisal fee, and points and fees incurred in loan origination. Your savings in interest must exceed refinancing fees in order for refinancing to be worthwhile.

Interested in refinancing? Experiment with the home refinance calculator. To learn more about refinancing a home, watch the short video below:

MHA Program for Distressed Homeowners Extended

The Making Home Affordable (MHA) program was introduced by the U.S. Department of the Treasury in April 2009 and has recently been extended through December 31, 2016. Broadly, the program aids homeowners who struggle to pay their mortgage payments and who lack the equity to refinance. The MHA program includes the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP), among other options.

HARP allows homeowners with loans guaranteed or owned by Fannie Mae and Freddie Mac who are underwater on their loans to refinance into mortgages with lower interest rates. Through HARP, over 3.1 million homeowners have refinanced their loans. Nearly a quarter of all refinances were part of the HARP program in the first quarter of 2014.

HAMP is designed to aid homeowners who can no longer afford their home loan payments and took out a loan before January 1, 2009 that is owned, insured, or guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA). Upon showing evidence of financial hardship and on-time loan payments during a trial period, HAMP has enabled over 1.3 million homeowners to permanently modify their mortgage loans. Homeowners save roughly a third of their monthly mortgage payments, or $544.

Both HARP and HAMP work to reduce the number of foreclosures, which fell to the lowest level since 2005 in May 2014. Recently, military resources for military homeowners and families who are permanently displaced by a job-related move have been incorporated into the MHA program.