Benefits of Refinancing

Benefits of Refinancing

There are a number of benefits which may be associated with Refinancing a home. While there are some situations where Refinancing is not the right decision, there are a host of benefits which can be gained from Refinancing under favorable conditions.

Some of these benefits include lower monthly payments, debt consolidation and the ability to utilize the existing equity in the home. Homeowners who are considering Refinancing should consider each of these options with their current financial situation to determine whether or not they wish to Refinance their home.

Lower Monthly Payments
For many homeowners the possibility of lower monthly payments is a very appealing benefit of Refinancing. Many homeowners live paycheck to paycheck and for these homeowners finding an opportunity to increase their savings can be a monumental feat.

Homeowners who are able to negotiate lower interest rates when they Refinance their home will likely see the benefit of lower monthly mortgage payments resulting from the decision to Refinance.

Each month homeowners submit a mortgage payment. This payment is typically used to repay a portion of the interest as well as a portion of the principle on the loan.

Homeowners who are able to refinance their loan at a lower interest rate may see a decrease in the amount they are paying in both interest and principle. This may be due to the lower interest rate as well as the lower remaining balance.

When a home is Refinanced, a second mortgage is taken out to repay the first mortgage. If the existing mortgage was already a few years old, it is likely the homeowner already had some equity and had paid off some of the previous principle balance.

This enables the homeowner to take out a smaller mortgage when they Refinance their home because they are repaying a smaller debt than the original purchase price of the home.

Debt Consolidation
Some homeowners begin to investigate Refinancing for the purpose of debt consolidation. This is especially true for homeowners who have high interest debts such as credit card debts.

A debt consolidation loan enables the homeowner to use the existing equity in their home as collateral to secure a low interest loan which is large enough to repay the existing balance on the home as well as a number of other debts such as credit card debt, car loans, student loans or any other debts the homeowner may have.

When Refinancing is done of the purpose of debt consolidation there is not always an overall increase in savings. Those who are seeking to consolidate their debts are often struggling with their monthly payments and are seeking an option which makes it easier for the homeowner to manage their monthly bills.

Additionally, debt consolidation can also simplify the process of paying monthly bills. Homeowners who are apprehensive about participating in monthly bill pay programs may be overwhelmed by the amount of bills they have to pay each month.

Even if the value of these bills is not worrisome just the act of writing several checks each month and ensuring they are sent, on time, to the correct location can be overwhelming. For this reason, many homeowners often Refinance their mortgage to minimize the amount of payments they are making each month.

Using the Existing Equity in the Home
Another popular reason for Refinancing is to use the existing equity in the home. Homeowners who have a considerable amount of equity in their home may find they are able to cash out some of this equity for other purposes.

This may include making improvements to the home, starting a business, taking a dream vacation or pursuing a higher degree of education. The homeowner is not limited in how they can use the equity in their home and may Refinance a home equity line of credit which can be used for any purpose imaginable.

A home equity line of credit is different from a loan because the funds are not disbursed all at once. Rather the funds are made available to the homeowner and the homeowner can withdraw these finds at anytime during the draw period.

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Checking Mortgage Rates Online

Checking Mortgage Rates Online

Homeowners who are planning to refinance their home may find the Internet to be a very worthwhile resource. The Internet is useful because it can give the homeowner a wealth of information as well as the ability to compare different rates from different lenders at their convenience.

While these options have made refinancing a more convenient process there is more potential for danger. However, homeowners who exercise a small amount of common sense in using the Internet for refinancing often find they are not at any additional risk.

Comparison Shop at Your Convenience
One of the most popular advantages to researching refinancing online is the ability to comparison shop at the homeowner’s convenience. This is important because many homeowners work long hours and often find they are not able to meet with lenders during regular business hours because of job restraints.

The Internet, however, is open 24 hours a day and allows homeowners to research their options, make important calculations or receive online quotes at any time of the day through the use of automated systems.

Homeowners can also take their time comparing the quotes they receive from these lenders online instead of feeling pressured to provide an immediate response.

While homeowners may have some additional time available to them, these same homeowners should realize they do need to act relatively quickly to lock in estimates they receive as interest rates are often time sensitive in nature and cannot be guaranteed for long periods of time.

Use Only Reliable Resources
Homeowners who are using the Internet to research refinancing options and obtain quotes should carefully consider their sources when making important decisions regarding the subject of refinancing.

Homeowners who stick with well known lenders and established websites will not likely encounter problems but those who select a new lender may be surprised by the results of the refinancing attempt.

Homeowners who are unsure about the reliability of a particular resource or lender should do additional research on the company. One of the easiest ways to do this is to consult the Better Business Bureau (BBB).

The BBB may be able to provide the homeowner with valuable information regarding the number of previous complaints against the company. A company who has a large number of unresolved complaints should be considered an unreliable company.

However, homeowners should not assume companies without a significant number of complaints are reputable unless the company has been in existence for a number of years and is a member of the BBB.

Homeowners should also take care not to be fooled by fancy web design. A website which looks very professional is not necessarily a website which is accurate and informative. Many skilled website designers can create websites which are both attractive and professional looking.

These website designers can also optimize a website for particular mortgage related keywords so users find the page easily when searching for these terms but this does not necessarily make the website designer knowledgeable about the subject to refinancing.

Confirm Loan Terms in Person before Committing
While shopping for refinancing options online is certainly easy and convenient, homeowners should consider completing the application process either in person or over the phone instead of relying on an automated system.

While the Internet is good for research purposes, homeowners can take advantage of face to face meetings or telephone conferences to ask all of their relevant questions. Asking all of these questions will help the homeowner to ensure he fully understand the loan terms as well as all of his available options.

Completing the refinancing process in person or over the phone can also prevent the homeowner from being surprised by any elements of the mortgage refinance.

This may include additional fees which are tacked on during the processing of the application, rates which are only available in certain situations or other elements of the refinancing agreement which could significantly impact the homeowner’s decision making process.

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Choosing a Fixed or ARM Option

Choosing a Fixed or ARM Option

One of the most important decisions a homeowner will have to make when deciding to refinance their home is whether they want to refinance with a fixed mortgage, an adjustable rate mortgage (ARM) or a hybrid loan which combines the two options.

The names are pretty much self explanatory but basically a fixed rate mortgage is a mortgage where the interest rate remains constant and an ARM is a mortgage where the interest rate varies. The amount the interest rate varies is usually tied to an index such as the prime index.

Additionally there are usually clauses which prevent the interest rate from rising or dropping dramatically during a specific period of time. This safety clause provides protection for both the homeowner and the lender.

Advantages of a Fixed Option
A fixed refinancing option is ideal for homeowners with good credit who are able to lock in a favorable interest rate. For these homeowners the interest rate they are able to retain makes it worthwhile for the homeowner to refinance at the new interest rate.

The major advantage to this type of refinancing options is stability. Homeowners who refinance with a fixed mortgage rate do not have to be concerned about how their payments may vary during the course of the loan period.

Disadvantages of a Fixed Option
Although the ability to lock in a favorable interest rate is an advantage it can also be considered a disadvantage. This is because homeowners who refinance to obtain a favorable interest rate will not be able to take advantage of subsequent interest rate drops unless they refinance again in the future. This will result in the homeowner incurring additional closing costs when they refinance again.

Advantages of an ARM Option
An ARM refinance option is favorable in situations where the interest rate is expected to drop in the near future. Homeowners who are skilled at predicting trends in the economy and interest rates may consider refinancing with an ARM if they expect the rates to drop during the course of the loan period.

However, interest rates are tied to a number of different factors and may rise unexpectedly at any time despite the predictions by industry experts.

A homeowner who can predict the future would be able to determine whether or not an ARM is the best refinancing option. However, since this is not possible homeowners have to either rely on their instincts and hope for the best or select a less risky option such as a fixed interest rate.

Disadvantages of an ARM Option
The most obvious disadvantage to an ARM refinancing option is that the interest rate may rise significantly and unexpectedly. In these situations the homeowner may suddenly find themselves paying significantly more each month to compensate for the higher interest rates.

While this is a disadvantage, there are some elements of protection for both the homeowner and the lender. This often comes in the form of a clause in the terms of the contract which prevents the interest rate from being raised or lowered by a certain percentage over a specific period of time.

Consider a Hybrid refinancing Option
Homeowners who are undecided and find certain aspects of fixed rate mortgages as well as certain aspects of ARMs to be appealing might consider a hybrid refinancing option.

A hybrid loans is one which combines both fixed interest rates and adjustable interest rates. This is often done by offering a fixed interest rate for an introductory period and then converting the mortgage to an ARM. In this option, lenders typically offer introductory interest rates which are extremely enticing to encourage homeowners to choose this option.

A hybrid loan may also work in the opposite way by offering an ARM for a certain amount of time and then converting the mortgage to a fixed rate mortgage. This version can be quite risky as the homeowner may find the interest rates at the conclusion of the introductory period are not favorable to the homeowner.

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Choosing a Lender

Choosing a Lender

Choosing a lender is a very important part of the process of refinancing a home. Understanding the different refinancing options and knowing how each of these options work is very important but none of this matters at all if the homeowner is unable to find a lender who is willing to offer them the rates and terms they are seeking.

Choosing a lender can be a long and difficult process but there are some ways to make it easier. One simple way to make it easier is to ask for advice from friends or family members who recently refinanced. Additionally, homeowners can do their own research to determine which lenders are able to offer them the best rate.

Finally the homeowner should determine whether or not the finances should be the governing factor in choosing a lender. Surprisingly enough, in most cases it is not.

Ask for Advice from Friends and Family Members
Friends and family members who recently refinanced can be a homeowner’s most valuable resource in the process of selecting a lender.

These friends and family members are so valuable because they will most likely be willing to offer you a quite candid opinion of the lender they used. This opinion may be either positive or negative but in either case it is useful to the homeowner.

If the opinion is negative the homeowner can remove this lender from their list of lenders to consider. Conversely if the lender comes highly recommended, the homeowner may consider this lender more carefully.

Comparison Shop
Homeowners who want to know which lender is offering them the best interest rate and financial terms should do a great deal of comparison shopping. The homeowner may even consider requesting quotes from each and every lender.

This should make it perfectly clear which lenders are willing to offer the homeowner more favorable rates. When comparing these quotes all of the factors should be considered to ensure the quotes are being compared fairly.

For example each quote should be broken down to determine the monthly savings, total savings, etc. All of this statistical data will make it much easier for the homeowner to make a wise decision when the time comes.

Consider More than Finances
Finally, while interest rates, loan terms and other financial matters are all certainly important none of these are more important than being treated fairly by the lender.

For this reason, the homeowner should carefully consider all of their lenders and should determine whether or not they feel as though the lender is responsive to his needs.

For example, a lender who does not return calls in a timely fashion or answer questions truthfully and accurately may not be the ideal lender for a homeowner even if he is the lender who is offering the most favorable rates.

Additionally, homeowners should trust their instincts regarding their trust in the lender. Some lenders simply do not appear to know what they are talking about. Homeowners might be inclined to avoid these individuals because they may end up doing more harm than good during the refinancing process.

Conversely some homeowners may be immediately impressed by the honesty and intelligence of another lender. In most cases, the homeowner would likely choose the second lender as long as the rates offered by each lender were comparable.

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Does It Pay to Refinance

Does It Pay to Refinance

This is a question many homeowners may have when they are considering Refinancing their home. Unfortunately the answer to this question is a rather complex one and the answer is not always the same.

There are some standard situations where a homeowner might investigate the possibility of Refinancing. These situations include when interest rates drop, when the homeowner’s credit score improves and when the homeowner has a significant change in their financial situation.

While a Refinance may not necessarily be warranted in all of these situations, it is certainly worth at least investigating.

Drops in the Interest Rate
Drops in interest rates often send homeowners scrambling to Refinance. However the homeowner should carefully consider the rate drop before making the decision to Refinance.

It is important to note that a homeowner pays closing costs each time they Refinance. These closings costs may include application fees, origination fees, appraisal fees and a variety of other costs and may add up quite quickly.

Due to this fee, each homeowner should carefully evaluate their financial situation to determine whether or not the Refinancing will be worthwhile.

In general the closing fees should not exceed the overall savings and the amount of time the homeowner is required to retain the property to recoup these costs should not be longer than the homeowner plans to retain the property.

Credit Score Improvements
When the homeowner’s credit scores improve, considering Refinancing is warranted. Lenders are in the business of making money and are more likely to offer favorable rates to those with good credit than they are to offer these rates to those with poor credit.

As a result those with poor credit are likely to be offered terms such as high interest rates or adjustable rate mortgages. Homeowners who are dealing with these circumstances may investigate Refinancing as their credit improves.

The good thing about credit scores is mistakes and blemishes are eventually erased from the record.

As a result, homeowners who make an honest effort to repair their credit by making payments in a timely fashion may find themselves in a position of improved credit in the future.

When credit scores are higher, lenders are willing to offer lower interest rates. For this reason homeowners should consider the option or Refinancing when their credit score begins to show marked improvement. During this process the homeowner can determine whether or not Refinancing under these conditions is worthwhile.

Changed Financial Situations
Homeowners should also consider Refinancing when there is a considerable change in their financial situation. This may include a large raise as well as the loss of a job or a change in careers resulting in a considerable loss of pay.

In either case, Refinancing may be a viable solution. Homeowners who are making considerably more money might consider Refinancing to pay off their debts earlier.

Conversely, those who find themselves unable to fulfill their monthly financial obligations might turn to Refinancing as a way of extending the debt which will lower the monthly payments.

This may result in the homeowner paying more money in the long run because they are stretching their debt over a longer pay period but it might be necessary in times of need. In these cases a lower monthly payment may be worth paying more in the long run.

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