Guide to Refinance

The guide to refinance your home

The term refinancing is used when a new loan is taken to pay off another old loan, which had been secured against the same assets or collaterals. This is generally done with a view to reduce the costs, say for instance, the old loan had a fixed rate of mortgage interest, and owing to the changes in financial situation, the rate of interest on the new loans has come down, then in such a circumstance, a new loan can be taken at the lower rates to pay up the old loan and hence avail the benefits of a lower interest rate being charged for the loan amount. However, the following factors need to be considered to ensure that you get a better deal when looking out for a new loan to refinance the home.

Gauging the market by comparing of the refinance rates

Before taking the loan, it is very important that you know the rates being offered by different lending parties. At least quotes from four different lenders, who maybe selected from online sources or maybe chosen from the regular sources or even a mix of these two categories, should be compared before finalizing so as to ensure that you have a hang of the market situation. This comparison will help in evaluating the various criticalities like tenure of the loan, equity benefits to you and even rate of the mortgage interest which are offered to you from different sources. This will ensure that you cancel out the high charging options and hence make a better decision.

Figuring out the right time for home refinancing

Home refinancing is not an option that should be exercised without a thought, since waiting for the right time will help you in getting maximum benefits from the refinance loans. In most cases, home refinancing is done if you have a mortgage on your home, but you are unable to pay the same, and in these cases you could apply for a second loan with a better rate of interest and overall terms, and pay off the first debt. Nevertheless, the amount which can be saved on interest balances and the total amount of fees which will be incurred for processing the refinancing are the major factors to consider when you actually decide to exercise the option of refinancing.

How to get a reduction in the rates of interest for your refinance-

Home is one of the biggest investments and hence along with it, the mortgage payment will also be one of the biggest components in the monthly budgets. Thus, if you sensibly apply for, and select a refinancing option with the lenders who are giving you the most beneficial deals and hence lower monthly mortgage payments, you will be able to reduce your monthly payments and generate some extra liquidity for yourself. In fact, this extra chunk of money can be reinvested in the house and increase your equity holding in this vital collateral.

The issue with most people is that they stretch beyond their limits when it comes to purchasing their dream homes and hence fall prey to the dictated high interest rates commanded by the lenders. However, there are some variables in this mortgage system and a proactive approach can help you get a better deal without compromising on the idea of the home that you want to purchase. For instance the amount of down payment and the mortgage rates are influenced by various factors including the credit rating, which is the first thing that can be improved. Moreover, the interest rates also fluctuate with various economic policies and in the period when the Federal Reserve provides a rate-cut, the interest rates significantly sink below the prevailing rates at the time you first took the mortgage. If you plan properly and make the decision of refinancing at this period in time, you will be able to get interest rates much lower than the original higher rate you were paying, and this difference will both reduce your monthly payments and hence increase your liquid capital.

Considering the fact that you can put the additional savings from this interest rate back in repaying the loans, you can also reduce the tenure of the refinancing and hence not only get free from the debt early, but also ensure losing less interests, since the number of installments get reduced. Let us for example consider a scenario where you had a 30-year mortgage, which you have been paying for the last 8 years. If you now take a refinance which offers you a lower rate of interest, and the amount you pay up in the installments remains the same, you will be able to finish the loan in a much shorter term of maybe 10, 15 or 20 years. What this will also ensure that since instead of 22 years remaining in your tenure, you finish the loan earlier, you would save on the interest of those 12, 7 or 2 years respectively for the shorter terms of 10, 15 and 20 years. This will also ensure your owning the collateral earlier than the other case and save money in terms of interest.

Get an Adjustable Rate for a Fixed Refinance Rate

The ARM or the adjustable rate mortgages are the options where the interest rates vary with time based on the market value. While the ARM options look good to the people who consider that their financial future is less secure and they are unsure of how long they would be able to hold on to the collateral and the home, or if they are not currently financially stable but expect their income to grow over a period of time when they would be able to afford the higher interest rates. However, if the investors are financially stable and plan to buy the house for turning it into their home for the next several years, it is advisable to switch over to the fixed rates in exchange of the adjustable rates, because over a period of time, as the interest rates grow, the adjustable rates don’t look impressive anymore. On the other hand, the fixed refinance rate will ensure higher security in terms of the monthly payments, which are fixed and immune to the fluctuations in the market environment.

The other option is to use cash-out refinancing, because it not only puts extra cash in your pocket, but also increases your stake on the equity of the home. What happens in a lot of cases is that a property was bought and the buyer did not have the funds to make a down payment of 20 percent and hence needed to purchase the Private Mortgage Insurance or the PMI. Now, if the value of the home has appreciated after the loan was taken and if the current valuation of the home exceeds 20 percent and if the debtors were paying their mortgage steadily, than in such cases, the refinancing can be used to take the benefit of the value appreciation and this increase in owner’s equity in the home can be used to even eliminate the PMI. The benefit of this elimination will lead to further reductions in the monthly payments as the PMI component will get cancelled off. This extra money can now be used in remodeling the house or in getting rid of the high-interest bills or any other related users by the debtor.

Hence, while there are pitfalls that need to be taken care in refinancing the houses, if the above simple methods are followed, it will ensure that you will not only be able to get added benefits for your refinance and help you to secure a better financial future, but it will also improve your credit scores drastically.

Updated: Jan 7, 2011 9:55