Consider Re-Financing
Understanding Re-Financing
Understanding the process of re-financing can be quite dizzying.
Homeowners who are bearing in mind re-financing might initially be
overwhelmed by the number of selections available to them. However,
after taking some time to educate themselves about the process, they
will likely find the process is not nearly as daunting as they had
imagined. This article will discuss some of the options available to
those interested in re-financing as well as some of the important
factors to regard in order to determine whether or not refinancing
is worthwhile.
Consider the Options
Homeowners have quite a few options available to them when they are
thinking about the possibility of re-financing their home. The most
significant decision is the type of loan they will choose. Fixed
rate mortgages and adjustable rate mortgages (ARMs) are the two main
types of mortgages the homeowners will likely encounter.
Additionally there are hybrid loan options available.
As the name implies, a fixed rate mortgage is one in which the
interest rate remains constant throughout the duration of the loan
period. This is an especially favorable type of loan when the
homeowner has credit which is sufficient enough to lock in a low
interest rate.
ARMs are mortgages where the interest rate fluctuates during the
course of the loan period. The interest rate is usually tied to an
index such as the prime index and is subject to rises and falls in
accordance with this index. This is known as a riskier type of loan
and is therefore often offered to homeowners who have less favorable
credit scores.
Although ARMs are considered somewhat risky there is usually a
certain degree of protection written into the loan agreement. This
may come in the form of a clause which resticts the amount the
interest rate can increase, in terms of percentage points, over a
fixed period of time. This can protect the homeowner from sharp
increases in the interest rates which would otherwise considerably
raise the amount of their monthly payments.
Hybrid loans are mortgages which merge together a fixed element with
an adjustable element. An example of this type of loan is a
situation where the lender may offer a fixed interest rate for the
first five years of the loan and a variable interest rate for the
remainder of the loan. Lenders typically offer a lower introductory
interest rate for the fixed period to make the mortgage seem more
enticing.
Consider the Closing Costs
The closing costs associated with re-financing should be carefully
considered when deciding whether or not to re-finance the home. This
is noteworthy because when homeowners re-finance their home they are
often subject to many of the same closing costs as when they
originally purchased the home. These costs may include, but are not
limited to appraisal fees, application fees, loan origination fees
and a host of other expenses. These costs can be quite significant.
The closing costs will be significant when the homeowner considers
the overall savings associated with re-financing.
Consider the Overall Savings
When deciding whether or not to re-finance, the overall savings is
one factor the homeowners should carefully think about. This is
important because re-financing is typically not considered
worthwhile unless it results in a financial savings. Although some
homeowners refinance to lower monthly costs and are not concerned
with the overall picture, most homeowners {{think about|consider}
whether or not they will be saving money by refinancing.
The amount of money the homeowner will save when re-financing is
largely dependent on the new interest rate in relation to the old
interest rate. Other factors come into play such as the remaining
balance of the existing loan as well as the amount of time the
homeowner means to stay in the home before selling the property. It
is important to note that the amount of money saved by negotiating a
lower interest rate is not equal to the entire savings. The
homeowner must determine the closing costs associated with
re-financing and subtract this sum from the potential savings. A
negative number would indicate the new interest rate is not low
enough to offset the closing costs. Conversely a positive number
indicates an overall savings. With this information the homeowner
can decide whether or not he wishes to re-finance.
ABOUT THE AUTHOR
Bob Schwartz, is a Certified Residential
Specialist, CA licensed real estate broker with
www.Brokerforyou.com. Bob
has over 27 years of residential real estate experience, authored a
number of published articles and served as an expert witness for
San Diego lawyers. You can contact
Bob via e-mail at bob@brokerforyou.com or visit his highly popular
San Diego real estate website at:
http://www.brokerforyou.com
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