Refinancing Home Loans or Mortgages
Refinancing means applying for a fresh loan by replacing an existing one, secured by the same assets. The most common consumer refinancing is for a home loan or home mortgage.
Refinancing is a prudent financial decision, which allows you to meet a variety of needs such as:
To reduce your monthly payments by taking advantage of lower interest rates or extending repayment periods
To reduce interest costs by refinancing a lower rate
Pay off high interest debts such as credit card debt, car loan debt etc
Liquidate equity and free up cash for untoward expenditure
Pay off the home loan mortgage faster
Reduce risk associated with an existing loan by refinancing an adjustable rate mortgage into a fixed rate one
What is a good time to refinance?
In a typical scenario when the interest rates drop half% to 5/8 % than your current rate, it would be a good time to refinance. Most people however see only a narrow picture where interest rates drop and financial circumstances change drastically to take on home mortgage refinancing. It is necessary to take in other factors like the duration of your stay in the home, how you plan to use your equity and the feasibility of refinancing vis--vis your overall financial goals. Keeping this in mind you will need to see which loan option is best for you and your refinancing needs and which home loan mortgage term offers an ideal repayment schedule.
There are basically two types of loans:
Fixed Rate Mortgages
These have fixed interest rates throughout the entire term of the loan. Not only do they protect you from rising interest rates but also allow you to budget your expenses by virtue of knowing your exact monthly payments.
Adjustable rate mortgages
Here the rates change periodically depending on market conditions. The initial rate is fixed and then the rate adjusts annually based on a fixed rate mortgage. It is however, controlled by a pre-determined adjustment cap.
Another common loan is 'Renovation Loan', which is taken by borrowers planning home improvements.
Loan terms
The term of the loan is the duration or the length of the loan and the time you will spend repaying it. These loans can range from 10 to 40 years. Taking a short term or long term loan will depend on your income as well as financial goals. While long-term home loan mortgage offers lower monthly payments and longer repayment schedules, shorter term loans mean higher monthly payments allowing faster repayments and higher earnings on interest.
Rate-Term Refinance and Cash-Out Refinance
A rate-term refinance has a loan amount that is just enough to repay the balance of the existing mortgage. The purpose of this loan is usually to reduce your interest rate and/or adjust your loan term.
A cash-out refinance has a loan amount that exceeds the current mortgage balance. The excess amount converts some of you home equity into cash, which you receive at loan closing.
Risks involved in refinancing
Closing and transaction fees- In some cases these fees may exceed the savings generated by refinancing. This should be carefully considered before choosing to refinance.
Early payment fees- Some home mortgage refinancing loans carry fees if payment of the loan is made early.
Higher interest costs- Some refinanced loans have lower initial payments, which may result in higher total interest costs over the term of the loan or expose the borrower to greater risks than in existing conditions.
Upfront fees- Refinancing lenders often requires payment of certain fees upfront and as part of the home mortgage refinancing process. This is expressed in points where one point is 1% of the total loan amount. Paying more points may get you lower interest rates, but it is important to weigh the pros and cons of points in the long run vis--vis the availability of funds.
After your application for mortgage refinancing using a home equity loan is completed, a mortgage specialist will verify your information and creditworthiness, which will then be used to underwrite decisions involving your risk taking abilities. The final phase of your home loan mortgage refinancing process will involve a closing agent to sign your loan documents.
Refinancing is a prudent financial decision, which allows you to meet a variety of needs such as:
To reduce your monthly payments by taking advantage of lower interest rates or extending repayment periods
To reduce interest costs by refinancing a lower rate
Pay off high interest debts such as credit card debt, car loan debt etc
Liquidate equity and free up cash for untoward expenditure
Pay off the home loan mortgage faster
Reduce risk associated with an existing loan by refinancing an adjustable rate mortgage into a fixed rate one
What is a good time to refinance?
In a typical scenario when the interest rates drop half% to 5/8 % than your current rate, it would be a good time to refinance. Most people however see only a narrow picture where interest rates drop and financial circumstances change drastically to take on home mortgage refinancing. It is necessary to take in other factors like the duration of your stay in the home, how you plan to use your equity and the feasibility of refinancing vis--vis your overall financial goals. Keeping this in mind you will need to see which loan option is best for you and your refinancing needs and which home loan mortgage term offers an ideal repayment schedule.
There are basically two types of loans:
Fixed Rate Mortgages
These have fixed interest rates throughout the entire term of the loan. Not only do they protect you from rising interest rates but also allow you to budget your expenses by virtue of knowing your exact monthly payments.
Adjustable rate mortgages
Here the rates change periodically depending on market conditions. The initial rate is fixed and then the rate adjusts annually based on a fixed rate mortgage. It is however, controlled by a pre-determined adjustment cap.
Another common loan is 'Renovation Loan', which is taken by borrowers planning home improvements.
Loan terms
The term of the loan is the duration or the length of the loan and the time you will spend repaying it. These loans can range from 10 to 40 years. Taking a short term or long term loan will depend on your income as well as financial goals. While long-term home loan mortgage offers lower monthly payments and longer repayment schedules, shorter term loans mean higher monthly payments allowing faster repayments and higher earnings on interest.
Rate-Term Refinance and Cash-Out Refinance
A rate-term refinance has a loan amount that is just enough to repay the balance of the existing mortgage. The purpose of this loan is usually to reduce your interest rate and/or adjust your loan term.
A cash-out refinance has a loan amount that exceeds the current mortgage balance. The excess amount converts some of you home equity into cash, which you receive at loan closing.
Risks involved in refinancing
Closing and transaction fees- In some cases these fees may exceed the savings generated by refinancing. This should be carefully considered before choosing to refinance.
Early payment fees- Some home mortgage refinancing loans carry fees if payment of the loan is made early.
Higher interest costs- Some refinanced loans have lower initial payments, which may result in higher total interest costs over the term of the loan or expose the borrower to greater risks than in existing conditions.
Upfront fees- Refinancing lenders often requires payment of certain fees upfront and as part of the home mortgage refinancing process. This is expressed in points where one point is 1% of the total loan amount. Paying more points may get you lower interest rates, but it is important to weigh the pros and cons of points in the long run vis--vis the availability of funds.
After your application for mortgage refinancing using a home equity loan is completed, a mortgage specialist will verify your information and creditworthiness, which will then be used to underwrite decisions involving your risk taking abilities. The final phase of your home loan mortgage refinancing process will involve a closing agent to sign your loan documents.
