Thursday, October 10, 2013

Home Refinancing 101


If you’re considering getting your home refinanced, you need to know what exactly is involved in the process. This is an important decision and if you go about it in the right way, you’ll be able to save a lot of money. But if you take one wrong step, it might prove to be a really expensive mistake.   Here are some basic concepts and information about how you need to prepare yourself.

A home refinancing transaction is one in which you swap out an existing loan for a new and more favorable one. The old loan is paid off with the amount received from the new loan. Sometimes borrowers apply for an extra amount while refinancing to get some equity out of an asset. This is called "cash out" refinancing.

Advantages of home refinancing

By going in for refinancing, you can better your financial situation in many ways. The benefits include lower interest costs which result in a reduction in the amount that you are required to pay monthly. You can reduce your risk and get cash out which can be used for other necessities. When you opt for home refinancing, you can consolidate debt and probably get some tax benefits as well.

Home refinancing and associated costs

Just like everything else in this world, home refinancing is not for free. You will need to pay fees to the new lender to make it worthwhile for him to disburse your loan. You may also have to pay for legal documentation and filing, appraisals, credit checks, and other related things.

Understand that even though a lender may advertise a loan as one having no closing costs, you will be paying those fees as part of other charges. This generally happens through a higher rate of interest.

Is home refinancing worthwhile?

Before you make a final decision regarding whether or not to go in for home refinancing, you need to consider both the plus and minus factors of your old mortgage and the proposed new one. In normal circumstances, home refinancing is a sensible move when there is a lower rate of interest or a lower monthly payment. If you can optimally restructure debt or get your loan term shortened, it’s definitely worthwhile.

Once you’re clear of all costs involved, you need to look at how much you’ll be saving over a period of time and how long it will take you to recover the associated up-front costs. An important consideration is whether you plan to live in the home and keep the loan for long enough so as to make it worthwhile.

Home refinancing makes real sense when you reap sound benefits from a new loan. Some guidelines that it might be a smart move are:

·         Rates of interest are substantially lower than your earlier mortgage

·         You plan to keep the loan and live in the home long term

·         Your credit rating has seen an upward movement since you got your earlier loan

·         You are eligible for an amortizing loan in place of an interest only loan

·         You can move out of a high risk mortgage

Home refinancing offers a lot of benefits but it can be a bad idea if it leads to increasing your risk and wasting money. It is best to understand the worth of your house before you decide to get a refinance. An online home value report can be generated at Neighborhood IQ for free. You also need to make sure that you’ll be able to recover all the refinancing costs before signing on the dotted line.

 

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