Understanding Re Financing

Understanding Re-Financing
Understanding the process of​ re-financing can be quite dizzying .​
Homeowners who are considering re-financing might initially be overwhelmed by the number of​ options 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​ consider 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 considering 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 varies 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​ considered 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 limits 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 combine 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​ significant 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 consider .​
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 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 intends 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 .​

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