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The Art of Refinancing a Home Loan

Posted by  on Apr 16, 2009
 
Refinancing refers to applying for a secured loan intended to replace an existing loan secured by the same assets. Refinancing can be very useful in managing mortgage loans due to varying interest rates. If a better interest rate becomes available, it may be a wise decision to refinance under new and better terms. Refinancing may be undertaken to reduce interest costs, to pay off other debts, or to reduce payment. Refinancing may also allow a borrower to change from a variable-rate to a fixed-rate loan. By refinancing an adjustable-rate mortgage or so-called "Balloon" mortgage into a fixed-rate one, the risk of interest rates increasing dramatically is removed, thus ensuring a steady interest rate over time. A borrower may also wish to liquidate any equity that may have accumulated during the borrower’s ownership of the property.

Refinancing was extremely popular in 2002. However, millions of Americans across the country still have mortgage loans with interest rates greater than 8%. It is ironic that many people will go out of their way to save a few dollars on groceries but they miss out on opportunities to save tens of thousands of dollars with mortgage refinancing. There are a few ways to recognize the best opportunities for mortgage refinancing while avoiding expensive mistakes.

The hassle of applying for a new home loan often discourages many homeowners to refinance. Millions of homeowners in the United States procrastinate mortgage refinancing and pay thousands of dollars in unnecessary interest every year. Even if the interest rate you qualify is only half a point better, mortgage refinancing can still save you money. With a qualified mortgage broker and a desire to save money, the hassle of refinancing can be cut and greatly rewarded.

Refinancing may not be for every homeowner. It is a big decision that may or may not lead to savings. A number of factors, including how long you plan on keeping your home, what your tolerance level is for financial risk, the sate of your credit, and how much equity you have in your home, must be mulled over carefully when contemplating refinancing. Any one of these factors could swing a new mortgage rate in your favor and make refinancing worthwhile. If you have a new job, were recently promoted, married, divorced, paid off your bills, or have simply been making all of your payments on time, your financial situation may be better than when you applied for your existing mortgage.

Also, certain types of loans contain penalty clauses triggered by an early payment of the loan, either in its entirety or a specified portion. In addition, 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. To calculate how long it will take you to benefit from the savings, divide the sum of your lender fees and closing costs by the amount you are saving each month with a lower payment amount. This will tell you how many months it will take you to break even and realize a savings from mortgage refinancing.

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