Reasons to Refinance
"Debt consolidation"
One benefit to refinance is debt consolidation. For reasons of lowering monthly payments and taking advantage of today's low home mortgage rates, consumers are refinancing their homes. The average credit card or personal loan has an annual percentage rate of 18-22%. To avoid the high interest rate, most borrowers will decide to payoff their credit cards in the loan. This way they can eliminate their monthly payments on credit cards and use the savings for other purposes.
"Lowering interest rate and loan term"
A benefit to refinance is to lower the interest rate and lower the loan term. By obtaining lower interest rates, you will be lowering your mortgage payments. In some situations where the mortgage payment reduces vastly, home owners are able to reduce their loan term at the same time, keeping their mortgage payments very reasonable.
By lowering the monthly principal and interest payment, you are in a situation to add the savings to your payment, which goes directly to principal. Mortgages are fully amortized which means that payments are both interest and principal. Any payment that is extra from the minimum amount due, goes directly into principal, which will help you pay the loan off faster and save you thousands of dollars in interest.
Some people make huge mistakes in their lives, mistakes for which they pay for many years to come. One such mistake is ignoring cash flow problems. If you can't meet your credit card, loans, mortgage or tax payments then you have a cash flow problem. If you are not saving few hundred dollars each month then you are having a cash flow problem.
Hopefully that is not your situation. You may be simply looking to better your interest rate to replace your existing mortgage. Maybe you need cash to do some home improvements or perhaps you need combination of things. You don't show much income and/or you were declined by your bank.
If your situation is not as critical as the first example above you should seriously consider taking an advantage of these super low rates.
An old rule of thumb was that rates needed to drop 1.5-to-2 percentage points below your existing rate before refinancing paid off. A better measure, though, is to determine how much you'll save each month by refinancing, versus how much it's going to cost you. The larger your loan, the more important every percentage point becomes.
For example: If you have a 25 year loan for $170,000, lowering your rate from 7.00 percent to 5.4 percent will save you $162.92 a month and $48,872.96 in interest over the life of the loan. You will save even more if you are paying off additional $10,000 in credit card debt.
Refinancing replaces your existing mortgage loan with another lower interest rate loan for the same amount. This can save you tons of money when market interest rates drop 1 or more percentage points lower than your present rate.
Refinancing can be used to reduce your interest rate, change the term of your loan or consolidate your debts.
With the equity in your home, refinancing is the smartest way to consolidate your debts. You can just throw your debts into the amount owed when you refinance. One monthly payment and one low interest rate. Refinancing is the best route to take because the interest rates are lower than any of your other consolidating options. If you have home equity and good to excellent credit, then this is your best option. (Home equity = home value less the balance of your existing mortgage financing)
Another way to make a refinance work for you is to refinance for more than the balance remaining on your old mortgage - in effect, tapping your home equity. Thanks to favorable rates, you may be able to do so without boosting your monthly outlay. For example, at 7.5%, the payment on a $250,000, 25 year fixed rate mortgage is $1,828.89. But at 5.75%, that same payment lets you borrow $42,611.61 more.
The best use for the extra cash is to pay off any higher-rate loans you may have. Let's say that you are carrying a $20,000 car loan at 8% and making minimum payments on a $20,000 credit-card balance at 17.5%. Your monthly payments on those debts would total $1,087.04. Then assume you refinanced your mortgage, taking out the needed cash to pay off your car and credit-card loans. You would be saving about 13,000 a year just in your payments - that's $13,000 less you need to make next year!
Cleaning Up Your Credit
If your credit history is less than sparkling, you might have to invest some time into cleaning up your credit report before you apply for a home loan. Depending on your credit status, the process can be as easy as reviewing a copy of your credit report and reporting errors or as complex as hiring a professional credit counselor to get your financial house in order.
Get The Facts
Reviewing a copy of your credit report will give you a full understanding of exactly where you stand. You can order comprehensive reports online that will provide complete information from the three major credit reporting firms. If you notice a minor reporting error you can often have the problem fixed simply by sending a letter to the appropriate parties outlining the problem. More serious reporting errors may take a little more time and effort to remove, but the results will be well worth the effort if the bogus information on your report is preventing you from getting a loan. If your credit report is accurate, but shows a history of credit problems, or if your currently in debt over your head, you may have to invoke the services of a professional credit counselor.
Watch Where You Turn
If someone claims they can erase your credit problems quickly for a few hundred dollars, chances are they are not telling the truth. After paying the money, you will likely still be in credit trouble, perhaps even more so than you were before. The truth is that there is no such thing as a quick fix to complex credit problems. It takes years to get into credit trouble and it will take time to get out of it. The more you're in debt, the more time it will take. It could take several years. If you are deeply in debt, you won't be able to get a mortgage until you are out of it. A respectable credit counseling service can be your best way out. It will help you clean up your report in the process.
Reputable services would never offer any type of quick fix. Instead, they will set up a repayment schedule and contact the various creditors to make an agreement in everybody's favor. In some cases a credit agency can convince a creditor to lower the interest rate. Creditors will often agree to the lower rate, when the alternative is receiving no money at all.
Once the credit repair company has created an agreeable repayment schedule, you simply send a monthly check to the counseling services, which distributes the proper amount to the various creditors. However, it is important to point out that some companies, especially retail stores, will not work with credit agencies. They insist on dealing directly with the creditor.
After you are established in you debt repayment program, some creditors may be willing to have your accounts shown as current on your credit report. Once you've completed the program, the credit repair service will give letters of support to you stating what you have accomplished, which can help in the application process. To get more information about your options, call the National Foundation for Consumer Credit at 1-800-388-2227.
Understanding Closing Costs
While calculating how much house you can afford, it's important to consider closing costs and the effect they have on the size of the loan you get and the interest rate you pay. Closing costs vary from lender to lender. The following guidelines will help you understand the different types of closing costs you may be required to pay.
Points
Points are typically the largest cost associated with getting a home mortgage. Each point represents one percent of the mortgage balance, or $1,000 for each $100,000 financed. Unlike other costs, points can not be financed into your payment and must be paid with cash at the close of escrow.The most common type of points are discount points. These are fees paid by the borrower to reduce the interest rate of the loan. The more points you agree to pay upfront, the lower your interest rate will be. Deciding whether or not to pay points depends on many factors including the amount of cash you have available after making the down payment, the amount of the discount and the length of time you plan on owning the house. You'll have to take a good look at the costs and payment schedule of different types of loans to decide which one is best for you. If you do not have extra cash to pay points, but still want to lower your interest rate, there's still hope. Some sellers are willing to pay the discount points or other closing costs in order to sell the property. It's worth asking, even if you have the money to pay. If you're being moved by your company, your relocation package may have a provision to help you reduce you monthly payment.
Origination Fees
Origination fees cover the lender's cost of processing the loan. The amount of the origination fees vary from lender to lender. Some lenders charge a flat fee, while others collect the fees as points.
Appraisal Fee
In order to fund the loan, the lender must verify the value of the home by comparing it to other houses that recently sold in the area. Appraisal fees are typically around $300, but can be higher depending on the lender.
Title Search
The lender will also require a title search to make sure the property belongs to the seller and he can rightfully sell it to you. Generally the buyer purchases title insurance for the lender to provide protection in the event of a legal challenge to the ownership of the property. Title search fees typically range from $300 to $1,000.
Other Fees
In addition to the fees above, you may also have to pay a number of other fees for signature notarization, government recording fees, transfer charges, property taxes and insurance fees. A reputable lender can give you a very close estimate as to what your closing costs will be before you start the loan process.
|
|
