Refinancing refers to replacing the current debt obligation with a new loan that has relatively favorable repayment terms. What is refinancing and is it advisable?

What is Refinancing?

Refinancing is the process of paying off an existing secured loan by obtaining a new loan, of the same size, that is again collateralized with the same property as the old loan. Obviously, refinancing does not eliminate one’s debt obligations since it only replaces an old loan with a new one. People, generally, refinance in order to save money on interest payments. However, one must weigh the proposed savings against the cost of refinancing before embarking on the same.

What is Mortgage Refinancing?

Mortgage refinancing refers to paying off an existing mortgage with a new one. Refinancing a mortgage results in using the same house as a collateral for obtaining a new mortgage to replace the existing loan. Although, to the casual observer, refinancing doesn’t seem to make sense, the logic behind refinancing can range from trying to benefit from a fall in the interest rates to the desire to shorten the term of the existing mortgage. The following are the popular reasons for mortgage refinancing:

Change in the Interest Rate: This is one of the main reasons behind refinancing. Refinancing may help a homeowner, who is paying a high rate of interest on the existing mortgage, obtain another mortgage that carries a lower rate of interest. Refinancing to a lower rate of interest is beneficial since the homeowner is now required to pay less in lieu of interest. Refinancing to a lower rate of interest is contingent on the ability of the borrower to procure financing at a favorable rate. This in turn is a function of his / her credit scores. Sometimes, a change in market conditions may result in the easy availability of low interest mortgage loans.

A fixed rate mortgage carries a fixed rate of interest, while an adjustable rate mortgage bears an interest rate that fluctuates with the prime rate. Hence, an adjustable rate mortgage has a cap and a floor to ensure that the interest rate does not increase or decrease indefinitely. Changing from a fixed rate level payment mortgage to an adjustable rate mortgage is desirable when the rate of interest declines and the trend is expected to continue for a certain length of time. In this situation, the borrower, who is paying the mortgage loan at a fixed rate of interest, may choose to avail the facility of repaying the loan at a lower rate of interest. Refinancing from an adjustable rate mortgage to a fixed rate mortgage is necessary if the interest rates are increasing and the trend is expected to continue for a substantial length of time. One needs to bear in mind that refinancing to an adjustable rate mortgage is riskier as compared to refinancing to a fixed rate of interest since the former exposes the homeowner to payments based on fluctuating mortgage rates.

Changing the Term of the Mortgage: A homeowner may be interested in changing the term of the mortgage for various reasons. For instance, a homeowner who is interested in expediting mortgage payments may prefer decreasing the term of the mortgage. What is the cost of refinancing? The answer would be larger monthly payments as a penalty for reducing the term of the mortgage. However, one must remember that decreasing the term of the loan obligation is possible only if monthly payments are higher, since one is required to pay a larger portion of the principal on a monthly basis. Again, increasing the term of the mortgage may be an option for people who are finding it difficult to keep up with the regular principal and interest payments. Such people may prefer refinancing to a mortgage with a greater repayment period.

What is Auto Refinancing?

Mortgage refinancing seems to make a great deal of sense. But what is car financing? Is it sensible to refinance a car loan? Car refinancing makes sense when the amount of the car loan is more than the worth of the automobile. This may happen because a person obtained the first car loan from a dealership at an unfavorable rate of interest. Car refinancing is not as popular as mortgage refinancing since cars have a depreciable life of 7 years and the chances of refinancing the loan at a favorable rate of interest is highly unlikely.

Refinancing is a decision that deserves careful contemplation. Mortgage refinancing may not be advisable for people who are interested in changing their primary residence. Refinancing may be foolhardy if the existing mortgage has prepayment penalties or if the loan is nearing maturity. Again, cash-out refinancing, that refers to refinancing for more than the current debt, may not be advisable since repaying the loan may prove to be cumbersome.

It may be a good idea to refinance your current mortgage in search of a better mortgage loan rate. Just make sure you dont fall for the common mortgage loan refinancing mistakes many others have. The following article contains 9 common refinancing mistakes that are pretty commonplace, and how to avoid them when refinancing a mortgage.

1. Not doing thorough research on lenders.

Most people are comfortable with their current bank or mortgage lender. This is a bad practice to become comfortable with. You should always shop around for the best rates. If you have a current mortgage lender you prefer you should still shop around and show them your offers and see if they will match, or better yet, beat it. Just like a big purchase, it pays to shop around. You will guarantee this way that you did get the best available mortgage refinancing rate you can. Also make sure to be aware that when you apply for the mortgage refinancing, even if its the same lender you currently use, you will need to re qualify for the loan.

2. Know when you will start to break even after you refinance

When you decide its time to refinance your mortgage, I can almost promise you will have to pay closing costs. These costs could negate any or all savings you received through the refinancing, at least initially. Calculate the costs of the closing fees and your new refinanced mortgage rate and see when your break in period is. This is when you are done paying any closing costs that have been added in due to the refinancing.

3. You have not received a Good Faith Estimate from your lender

Any potential mortgage lender should be able to provide you with something called a Good Faith Estimate. This is a estimate that covers the closing costs, any “hidden” fees, and any other fees associated with getting a mortgage refinance. This should be given to you within 3 business days but there is no reason your lender cant give you one earlier if you ask for it.

4. The Assessed Value of Property should not be considered

The assessed value of property is determined by the local county tax assessor. Your loan amount will not be based on this assessors value. Your property will be valued using another approach called the, sales comparison approach, also known as the cost approach.

5. Getting an appraisal for a home with low value

If you know that your home is not that valuable, you should not pay to have its value assessed. You should ask your mortgage lender to appraise your house for you using the AVM model (automated valuation model) this method uses other houses in the neighborhood to find a good average house price in any given area.

6. Do not sign anything without properly reviewing it

Make sure to check, and double check all the loan documents before you sign them. Carefully, read all the terms and conditions of your possible loan before signing. If you can, ask for a copy of the loan documents a few days before the official signing so you can review them on your own time.

7. Not providing the necessary documents in a timely manner.

Stop unnecessary delays in the closing process by having all the proper documents ready to submit when the lender asks you too. If you delay too long with this, the rates on your loan may go up by the time you are ready to sign.

8. Not getting it in writing

Sure, there are trustworthy people in the mortgage lending industry, but surely when it comes to this much money, make sure everything is in writing. Often, your lender will give you an initial verbal agreement about your rates. Get him to put those on paper. If its not on paper, its not official.

9. Using your heloc prior to refinancing

If you have taken out any kind of home equity loan of credit, for anything but home improvements or repairs, do not immediately apply for refinancing. You should wait at the minimum 6 months before approaching a mortgage lender about refinancing. This is the same as taking out more credit, and will be viewed as such when applying for the refinancing.

Making a mistake during the long refinancing process can cost you thousands of dollars, let alone time wasted. Make sure you do all the research you can before entering the mortgage refinancing world.

After spending a lot of time struggling against mortgages, credit card debts, and many other types of loans, one now can simply overcome all of these obstacles and threats using refinancing, the process of paying off one loan with the proceeds from a new loan secured by the same property. What we are going to tackle in this article is the Pros and Cons of Refinancing.

Refinancing can be considered a means with which a person replaces his/her current loan with a new loan in order to save money. The loan can be of any type. It can be any consumer debt or a credit card debt or a mortgage.

Many people shelter to refinancing nowadays because it has many pros:

As it helps people to reduce interests, risk, and periodic payment obligations by either lowering the interest rate owed on the loan or extending the period of loan. Also everyone looks for refinancing in order to be able to achieve equity faster.

There are too many individuals who are “house rich and cash poor.” What value is it if your house is paid off in full, but you do not have any liquid cash to support? Keep in mind that your house will no doubt appreciate over the next few years. It will do so whether or not you have a large or a small mortgage. The more equity you have in your house will put more money in your pocket when you sell it, but while you are living in the house it is only “dead equity.”

In essence refinancing can be used to transform available equity in one’s house into ready cash, available for other purposes or expenses.

Refinancing an adjustable-rate mortgage into a fixed-rate one, ensures a steady interest rate over time, by removing the risk that interest rate might increase terribly.

As no one is perfect, also there is not good thing without some risks and cons:

Lenders sometimes offer no-cost refinancing, charging you zero points for your mortgage loan. Generally, you will pay a higher interest rate than on an otherwise comparable mortgage with points, and you’ll still have to pay the other costs associated with the loan. there are also closing and transaction fees typically associated with refinancing a loan or mortgage. In some cases, these fees may outweigh any savings generated through refinancing the loan itself.

Some sub prime lenders charge excessively high fees, but you can screen these out by comparing mortgage rates.

All you need is to determine the goal behind seeking a refinancing, collecting information about several lenders options and then work on your refinancing.

Finally it became apparent that refinancing, as having lots of advantages it also has disadvantages and risks. You should pay great attention that some refinanced loans, while having lower initial payments, may result in larger total interest costs over the life of the loan, or expose the borrower to greater risks than the existing loan, depending on the type of loan used to refinance the existing debt.

So you have to be careful and Calculate the up-front, ongoing, and potentially variable costs of refinancing while making a decision on whether or not to refinance and you have to Check your mortgage agreement to see whether it contains a prepayment penalty, and try to avoid prepayment penalties in any refinanced mortgages.