The timing has never been better to refinance your mortgage. Rates are the lowest they have every been and your monthly savings could be huge! When choosing a refinance lender, there are a few items to pay close attention to: Rate and APR are different. The rate is the rate the lender is showing, but APR is the actual rate you end up with because it has most of the fees in it.
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What is a Refinance?
With this option, you receive a completely new mortgage with new terms, interest rates and monthly payments. The new loan completely replaces your current mortgage and may lower your payment, which could help improve your monthly financial situation.
Refinancing may be an option if:
- You are current on your mortgage payments
- You have an adjustable rate mortgage or a high interest rate
- You have equity built up in your home
What are the benefits?
- Make your payment more affordable by lowering your interest rate or adjusting the other terms of your loan
- Creates no negative activity or event on your credit history
- Stay in your home and avoid foreclosure
How does it work?
If you qualify to refinance your mortgage, you’ll go through an application, approval and closing process (similar to when you got your original mortgage). Your mortgage company will work with you through every step, and will help determine the best mortgage option for your specific needs.
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What You Should Know Before Refinancing
Getting a new mortgage to replace the original is called refinancing. Refinancing is done to allow a borrower to obtain a better interest term and rate. The first loan is paid off, allowing the second loan to be created, instead of simply making a new mortgage and throwing out the original mortgage. For borrowers with a perfect credit history, refinancing can be a good way to convert a variable loan rate to a fixed, and obtain a lower interest rate. Borrowers with less than perfect, or even bad credit, or too much debt, refinancing can be risky.
In any economic climate, it can be difficult to make the payments on a home mortgage. Between possible high interest rates and an unstable economy, making mortgage payments may become tougher than you ever expected. Should you find yourself in this situation, it might be time to consider refinancing. The danger in refinancing lies in ignorance. Without the right knowledge it can actually hurt you to refinance, increasing your interest rate rather than lowering it. Below you will find some of this basic knowledge written in order to help you reach your best deal. For comparative purposes, here is a rate table highlighting current rates in your area.
How Many Types Of Refinancing Are There?
Homeowners can choose to refinance for a variety of reasons including:
- Cash out home equity: homeowners can extract equity from the homes. If the equity is extracted to pay for home repairs or major home improvements the interest expense may be tax deductible.
- Change loan duration: shorten duration to pay less interest over the life of the loan & own the home outright quicker; lengthen the duration to lower monthly payments.
- Lower rates: if mortgage rates decline homeowners can refinance to lower their monthly loan payments.
- Change loan structure: borrowers who used an ARM to make initial payments more afforadable could shift to a fixed-rate loan after they built up equity & have progressed along their career path.
- Remove mortgage insurance requirement: some loan programs like FHA loans may require a mortgage insurance policy even after the homeowner has built up substantial equity, whereas a conventional loan no longer required PMI if the owner has at least 20% equity in the home.
What Are The Risks?
One of the major risks of refinancing your home comes from possible penalties you may incur as a result of paying down your existing mortgage with your line of home equity credit. In most mortgage agreements there is a provision that allows the mortgage company to charge you a fee for doing this, and these fees can amount to thousands of dollars. Before finalizing the agreement for refinancing, make sure it covers the penalty and is still worthwhile.
Along these same lines, there are additional fees to be aware of before refinancing. These costs include paying for an attorney to ensure you are getting the most beneficial deal possible and handle paperwork you might not feel comfortable filling out, and bank fees. To counteract or avoid entirely these bank fees, it is best to shop around or wait for low fee or free refinancing. Compared to the amount of money you may be getting from your new line of credit, but saving thousands of dollars in the long run is always worth considering.
Sources: knowyouroptions.com, mortgagecalculator.org, bankrate.com, bankofamerica.com, investopedia.com