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Basics of Refinance and Refinancing Lenders

Posted by  on Apr 16, 2009
 
Refinance lenders usually require an upfront payment of a certain percentage of the total loan amount as part of the process of refinancing debt. The amount is usually expressed in points. Therefore, if the refinance option selected involves paying three points, then the borrower will need to pay three percent of the total loan amount upfront. Most refinancing lenders offer a variety of combinations points and interest rates. Paying more points typically allows one to get a lower interest rate than one would be capable of getting if one paid fewer or no points.

Points can be paid out of the cash saved by refinancing the loan in the first place. The decision of whether or not to pay points, and how many points to pay, should be taken in consideration of the fact that with points, one tends to trade a higher upfront cost in exchange for a lower monthly premium later on.

In general, refinancing may be undertaken to reduce interest costs to pay off other debts, to reduce one's periodic payment obligations, to reduce risk, or to liquidate some or all of the equity that has accumulated in real property during the tenure of ownership.

Refinancing a mortgage or other type of loan can lower the monthly payments owed on the loan either by changing the loan to a lower interest rate, or by extending the period of loan, so as to spread the re-payment out over a long period of time. The money saved can be used to pay down the principal of the loan, thus further reducing payments. Refinancing can be used to transform available equity in someone’s house into ready cash, available for other purposes.

An alternate use of refinancing is to reduce the risk associated with an existing loan. Interest rates on adjustable-rate loans and mortgages shift up and down based on the movements of the various prime rates used to calculate them. In addition, refinancing a loan or a series of debts can assist in paying off high-interest debt such as credit card debt, with lower-interest debt such as that of a fixed-rate home mortgage. The net savings between the two interest rates can then be applied either towards further paying down the debt, or other purposes. In addition, non-tax deductible debt, such as credit card or car loan debt, can be transformed into tax-deductible debt such as home mortgage debt, potentially lowering one's taxes or shifting one into a more advantageous tax bracket. This type of refinance refers to a change in the rate and term of an existing loan. A refinance is considered rate and term if the borrower secures a lower interest rate, or changes the terms of a loan to ensure a longer fixed period or a lower payment plan, without paying off any additional debts or taking any cash in hand.

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