Refinancing guide to find out when and how to act

Three steps to begin your refinance.
Step 1: Decisions, Decisions
Step 2: Getting Ready
Step 3: Loan Choices

Step 1: Decisions, Decisions
The decision to refinance depends on many variables. How long have you owned the home? How long do you expect to continue to hold an ownership position? Has your ability to qualify for financing changed since you took out your original loan? Do the savings justify the cost or the hassle? Will you incur a penalty if you pay off your current loan too soon?

Why Refinance?
Most people refinance to lower their monthly mortgage payments. If rates have come down significantly since you obtained your original loan, you may be able to cut your payments substantially. But there are other reasons to turn in your old loan, too.

Perhaps you want to reach into the equity that's built up in your home since you bought it. In that case, you can do a "cash-out refi" by taking out a new mortgage based on the home's current worth, pay off what you still owe on the old loan and pocket the difference.

Or maybe you want to shorten the period you'll be making payments. You can do that by swapping your current 30-year mortgage for a 15-year loan or one of practically any other duration. If rates have come down enough, you may even be able to achieve this with little or no increase in your monthly outlay.

Another reason to refinance might be to jump from an adjustable-rate mortgage (ARM) - where your rate changes with market conditions - to a fixed-rate loan which offers the certainty of set payment amounts no matter what happens to mortgage rates in the future. Or, since ARMs often start off at rates substantially lower than those charged for fixed loans, you might want to go the other way and take advantage of a particularly low introductory ARM rate. You might even want to switch from an ARM which is about to be more costly (the rate's going up) to another ARM with a lower starting rate. Your options are practically endless.

What are my refinancing options?
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When to Refinance
At one time, the general rule of thumb was that it paid to refinance only when the current rate is two percentage points lower than what you are currently paying. But with the advent of "no- cost" refinancing options, that precept is no longer valid. However, the term "no-cost" is something of a misnomer. It doesn't mean free; it means you won't have to pay anything out of your own pocket at the time of closing. Either the fees charged by the lender will be rolled into your new loan balance or the rate will be somewhat higher than you could obtain if you paid the lender's charges up-front.

Still, the real determinant is how long it will take to recoup your costs. One idea is to weigh monthly savings against up-front costs. If you can save $100 a month on your mortgage payment by refinancing, but you have to pay $2,500 for the privilege, then you have to keep the new loan for at least 25 months to make up the difference. If you're planning to move sooner, it doesn't pay to refinance. But if you are going to stay in the house longer, refinancing is usually a sound financial decision.

Should I refinance?
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When Not to Refinance
The missing link in all of this is how long you've held your current mortgage. Because you will be starting all over again with a brand new mortgage, the longer you have had your present loan, the less advantageous it is to refinance, especially if the difference between your old and new interest rate isn't significant.
Consider someone who wants to trade in a four-year-old loan on which he has already paid $25,000 in interest. By starting over, he could be paying more in interest for both loans than if he had stuck with the old one, depending on the difference in rates. You should do the math before making a final decision.

Remember, your house payments in the early years of your loan are almost all interest. Popular wisdom has it that interest isn't so bad because it's deductible. But interest isn't all it's cracked up to be. For one thing, interest is cash out of pocket - your pocket. Yes, every dollar you pay in interest is deductible on your tax return, but your tax savings is only equivalent to your tax bracket. So if you are in, say, the 31 percent bracket, your net write-off is just 31 cents, not a full $1.

The only sound way around this problem is to switch to a loan with a shorter term, say 15 years rather than 30. Your monthly savings may not be significant, but you'll be shaving years off your loan, so your total interest costs won't be as great.

Another potential roadblock: A prepayment penalty clause in your current mortgage.

Many lenders now charge borrowers a penalty if they pay off their loans before a certain period. Usually, that's no more than two years, but sometimes it's five. The fee, which might be as much as a percentage of the unpaid balance or as little as a full month's interest, protects lenders against losing loans before they become profitable. In exchange, the borrower usually gets a slight break on his or her interest rate. But if rates fall during the penalty phase of the loan, the charge is one more cost you have to absorb.

Prepayment penalties are illegal in mortgages insured or guaranteed by the federal government and some other loans. Your loan documents will tell you whether your mortgage contains such a clause as well as the length of the penalty period and the fee.

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How Much Will it Cost?
Since refinancing means you are taking on an entirely new loan, figure on spending roughly as much as you did to close your original mortgage. You're likely to be charged an application fee, points, a loan origination fee, a title search fee, a title insurance binder, an appraisal fee and other miscellaneous costs.

But what you actually pay is usually up to you and your ability to sniff out and bargain for the best possible deal. Generally, you can obtain the lowest possible rate on your new loan by paying all the loan costs yourself. But you may be able to get some of the fees waived if you return to your original lender. At the same time, though, other lenders might be willing to omit some charges to get your business.

It's also possible to finance your closing costs as part of the amount you are borrowing or eliminate them altogether by agreeing to pay a somewhat higher interest rate.
Three steps to begin your refinance.
Step 1: Decisions, Decisions
Step 2: Getting Ready
Step 3: Loan Choices


This article "Refinancing guide to find out when and how to act" will be helpful to who are looking for "" related home loan informations.
Refinancing guide to find out when and how to act
Step 1: Decisions, Decisions:The decision to refinance depends on many variables. How long have you owned the home? How long do you expect to continue to hold an ownership position? Has your ability to qualify for financing changed since you took out...

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