Is Re-Financing Always Worthwhile?

Is Re-Financing Always Worthwhile?

This is a very important question which all homeowners should ask themselves both at the start and towards the end of the process of re-financing. The answer to this question can spur the homeowner to investigate re-financing further or convince the homeowner to table the thoughts of re-financing for the moment and concentrate on other aspect of owning a home.

Establish Financial Goals

This should be the first step in the process of determining whether or not re-financing is worthwhile. Without this step, a homeowner cannot accurate answer the question of the worth of re-financing because the homeowner may not fully understand his own financial goals. While financial goals may run the gamut from one extreme to another the most basic question to ask is whether the more significant goal is long term savings or increased monthly cash flow. This is important because re-financing can usually achieve these two goals.

Do You Want to Save Money in the Long Run?

Homeowners who establish a goal of saving money in the long run should consider re-financing options such as lower interest rates or shorter loan terms. Both of these options can considerably lower the amount of interest the homeowner is paying on the loan. This is significant because paying less interest will result in a greater cost savings.

Consider an example where a homeowner has an existing debt of %100,000, an interest rate of 6.25%PRCTG% and a loan term of 30 years. Just by reducing the loan term to 15 years the homeowner can significantly decrease the amount which is paid in interest during the course of the loan. However, this option will also result in an increase in the monthly payments made by the homeowner. Therefore this type of re-financing option may only be available to those who have enough cash flow to compensate for the increase in monthly payments.

Do You Want to Increase Your Monthly Cash Flow?

Some homeowners may have a chosen goal of increasing their monthly cash flow. For these homeowners the overall cost savings may not be as important as having more money available to them each month. These homeowners might consider a re-financing option in which they are able to extend their loan terms. This means they will be repaying the existing debt over a longer period of time. The homeowner will pay more in interest in the long run but will achieve their goal of lower monthly payments and an increased cash flow.

How Will Re-Financing Affect Tax Deductions?

This is another serious consideration for homeowners who are interested in investigating the possibility of re-financing. The interest paid on a home loan is often tax deductible. A homeowner who re-finances in a manner which results in less interest being paid annually may adversely affect their tax strategy. The implications of this type of chance can be amplified for homeowners who were previously just below a significant tax break line. A significant decrease in the amount of interest paid will mean a significant decrease in the deduction the homeowner is allowed to take. This reduced deduction can put the homeowner in an entirely different tax bracket and could end up costing the homeowner money in the long run. For this reason, homeowners who are considering re-financing should have a tax preparation professional determine the ramifications re-financing will have on their tax return before a decision is made.

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Are You Considering Re-Financing?

Are You Considering Re-Financing?

Homeowners who are considering re-financing their home may have a wealth of options available to them. However, these same homeowners may find themselves feeling overwhelmed by this wealth of options. This process doesn?t have to be so difficult though. Homeowners can greatly assist themselves in the process by taking a few simple steps. First the homeowner should determine his refinancing goals. Next the homeowner should consult with a re-financing expert and finally the homeowner should be aware that re-financing is not always the best solution.

Determine Your Goals for Re-Financing

The first step in any re-financing process should be for the homeowner to determine his goals and why he is considering re-financing. There are many different answers to this question and none of the answers are necessarily right or wrong. The most important thing is that the homeowner is making a decision which helps him achieve his financial goals. While there are no right or wrong answer to why re-financing should be considered there are, however, certain reasons for re-financing which are very common. These reasons include:

* Reducing monthly mortgage payments
* Consolidating existing debts
* Reducing the amount of interest paid over the course of the loan
* Repaying the loan quicker
* Gaining equity quicker

Although the reasons listed above are not the only reason homeowners might consider re-financing, they are some of the most popular reasons. They are included in this article for the purpose of getting the reader thinking. The reader may find their mortgage re-financing strategy fits into one of the above goals or they may have a completely different reason for wanting to re-finance. The reason for wanting to re-finance is not as important as determining this reason. This is because a homeowner, or even a financial advisor, will have a difficult time determining the best re-financing option for a homeowner if he does not know the goals of the homeowner.

Consult with a Re-Financing Expert

Once a homeowner has figured out why they want to re-finance, the homeowner should consider meeting with a re-financing expert to determine the best refinancing strategy. This will likely be a strategy which is financially sound but is also still geared to meeting the needs of the homeowner.

Homeowners who feel as though they are particularly well versed in the subject of re-financing might consider skipping the option of consulting with a re-financing expert. However, this is not recommended because even the most educated homeowner may not be aware of the newest re-financing options being offered by lenders.

While not understanding all the options may not seem like a big deal, it can have a significant impact. Homeowners may not even be aware of mistakes they are making but they may here of friends who re-financed under similar conditions and receive more favorable terms. Hearing these scenarios can be quite disheartening for some homeowners especially if they could have saved considerably more while re-financing.

Consider Not Re-Financing as a Viable Option

Homeowners who are considering re-financing may realize the importance of evaluating a number of different re-financing options to determine which option is best but these same homeowners may not realize they should also carefully consider not re-financing as an option. This is often referred to as the ?do nothing? option because it refers to the conditions which will exist if the homeowner does not make a change in their mortgage situation.

For each re-financing option considered, the homeowner should determine the estimated monthly payment, amount of interest paid during the course of the loan, year in which the loan will be fully repaid and the amount of time the homeowner will have to remain in the home to recoup closing costs associated with re-financing. Homeowners should also determine these values for the current mortgage. This can be very helpful for comparison purposes. Homeowners can compare these results and often the best option is quite clear from these numeric calculations. However, if the analysis does not yield a clear cut answer, the homeowner may have to evaluate secondary characteristics to make the best possible decision.

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Re-Financing with an ARM

Re-Financing with an ARM

An adjustable rate mortgage (ARM) is one of the most popular options available for both home mortgages and re-financing. Many homeowners do not fully understand the concept of an ARM and as a result may be somewhat hesitant to pursue this type of a mortgage. This is a shame because there are some situations in which an ARM or a hybrid mortgage can be the best mortgage solution for a homeowner who is in the process of re-financing. This article will focus on explaining the concept of an ARM, explaining situations where it is the best solution, debunking the most popular misconception regarding ARMs and explaining how those with bad credit can benefit from an ARM. At the conclusion of this article the reader should have a better understanding of ARMs and should be inspired to investigate this re-financing option further.

What is an ARM?

An ARM is an acronym for an adjustable rate mortgage. This means the interest rate associated with the mortgage is not fixed. Instead it is tied to an index such as the prime index and may rise and drop as the associated index rises and drops. The fact that interest rate is variable scares away many homeowners from considering this option further. However, there are certain safety measures in place which protect the homeowner from rapid increases. This safety measure will be discussed in greater detail later in the article on the section on the biggest myth regarding an ARM. However, for now homeowners should simply be aware that they would not be subjected to incredibly high interest jumps during a short period of time.

The Biggest ARM Myth

The variability of the interest rate in an ARM makes many homeowners feel very apprehensive. These homeowners envision interest rates going through the room during their loan term and resulting in their monthly payments skyrocketing. However, fortunately for these homeowners, rapidly increasing interest rates may not have a significant effect on ARMs.

This is because most ARMs have a built in clause which prevents the interest rate from rising more than a certain amount during a specific time period. During this time the national interest rate may rise significantly more but there is a cap on the amount the homeowner?s interest rate will be raised.

When is an ARM Desirable?

One of the most desirable situations for an ARM is as a part of a hybrid mortgage. Hybrid mortgages typically have one component which is fixed and one component which is adjustable. These types of mortgages may have a fixed rate for a set number of years begin to vary after this initial period. Alternately a hybrid loan may be variable for a number of years and then become fixed after this initial period.

The loan which begins with a fixed rate is usually desirable because the introductory rate is typically lower than the rate offered on traditional fixed loans for homeowners with comparable credit ratings. Homeowners may particularly like this option if they are repaying a smaller second mortgage and may be able to repay the loan in full before the introductory period ends.

ARMs for Those with Bad Credit

ARMs can also be very helpful for assisting those with bad credit in purchasing a home for the first time. There are a variety of loan options available today which makes it possible for even homeowners with poor credit to obtain a home loan. However, those with bad credit are usually offered these loans with unfavorable terms such as higher interest rates. Additionally, lenders may only be able to offer those with poor credit an ARM. Lenders take a significantly greater risk when they lend money to a homeowner with bad credit. As a result the lenders usually compensate for this increased risk by shackling the homeowner with less favorable such as a mortgage with an adjustable rate as opposed to a fixed rate.

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Choosing a Fixed or ARM Option

Choosing a Fixed or ARM Option

One of the most important decisions a homeowner will have to make when deciding to re-finance their home is whether they want to refinance with a fixed mortgage, an adjustable rate mortgage (ARM) or a hybrid loan which combines the two options. The names are pretty much self explanatory but basically a fixed rate mortgage is a mortgage where the interest rate remains constant and an ARM is a mortgage where the interest rate varies. The amount the interest rate varies is usually tied to an index such as the prime index. Additionally there are usually clauses which prevent the interest rate from rising or dropping dramatically during a specific period of time. This safety clause provides protection for both the homeowner and the lender.

Advantages of a Fixed Option

A fixed re-financing option is ideal for homeowners with good credit who are able to lock in a favorable interest rate. For these homeowners the interest rate they are able to retain makes it worthwhile for the homeowner to re-finance at the new interest rate. The major advantage to this type of re-financing options is stability. Homeowners who re-finance with a fixed mortgage rate do not have to be concerned about how their payments may vary during the course of the loan period.

Disadvantages of a Fixed Option

Although the ability to lock in a favorable interest rate is an advantage it can also be considered a disadvantage. This is because homeowners who re-finance to obtain a favorable interest rate will not be able to take advantage of subsequent interest rate drops unless they re-finance again in the future. This will result in the homeowner incurring additional closing costs when they re-finance again.

Advantages of an ARM Option

An ARM re-finance option is favorable in situations where the interest rate is expected to drop in the near future. Homeowners who are skilled at predicting trends in the economy and interest rates may consider re-financing with an ARM if they expect the rates to drop during the course of the loan period. However, interest rates are tied to a number of different factors and may rise unexpectedly at any time despite the predictions by industry experts.

A homeowner who can predict the future would be able to determine whether or not an ARM is the best re-financing option. However, since this is not possible homeowners have to either rely on their instincts and hope for the best or select a less risky option such as a fixed interest rate.

Disadvantages of an ARM Option

The most obvious disadvantage to an ARM re-financing option is that the interest rate may rise significantly and unexpectedly. In these situations the homeowner may suddenly find themselves paying significantly more each month to compensate for the higher interest rates. While this is a disadvantage, there are some elements of protection for both the homeowner and the lender. This often comes in the form of a clause in the terms of the contract which prevents the interest rate from being raised or lowered by a certain percentage over a specific period of time.

Consider a Hybrid Re-Financing Option

Homeowners who are undecided and find certain aspects of fixed rate mortgages as well as certain aspects of ARMs to be appealing might consider a hybrid re-financing option. A hybrid loans is one which combines both fixed interest rates and adjustable interest rates. This is often done by offering a fixed interest rate for an introductory period and then converting the mortgage to an ARM. In this option, lenders typically offer introductory interest rates which are extremely enticing to encourage homeowners to choose this option. A hybrid loan may also work in the opposite way by offering an ARM for a certain amount of time and then converting the mortgage to a fixed rate mortgage. This version can be quite risky as the homeowner may find the interest rates at the conclusion of the introductory period are not favorable to the homeowner.

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Learning about Re-Financing Online

Learning about Re-Financing Online

Many homeowners find the Internet to be very useful during the re-financing process. The Internet may be useful because it provides the homeowner with a wealth of information, because it provides the ability to submit loan applications and receive estimates online and because makes it easy for homeowners to consider complicated mathematical equations for a variety of options with ease. While the Internet can be a homeowner?s best friend it can also be the homeowner?s worst enemy. Homeowners who are using the Internet to perform the majority of their re-financing research should be aware of the potential problems associated with finding information online. Additionally, this article will provide the reader with useful information regarding the types of information they may find on the Internet as well as tips for selecting reliable Internet resources.

Exploring the Internet

Whether you refer to it as the Internet or the World Wide Web, there is no denying the way the Internet has changed our society. Just a few years ago, the process of re-financing was largely done during banking hours by meeting directly with financial advisors. However, this is no longer the case.

The major advantage young homeowners have over their parents or grandparents is the ability to learn more about re-financing options quickly and even receive quotes online in a matter of minutes. While the process of re-financing still involves elaborate mathematical calculations, many of these calculations have been automated so the homeowner only has to enter in the known variables to solve for the unknowns. These calculators are readily available throughout the Internet. Each calculator may not be designed identically so homeowner should use a couple of calculators to determine an approximate range of answers.

Besides finding information and utilizing mortgage calculators, the Internet can also be used to obtain quotes. Homeowners are able to fill out simple forms with only a few pieces or relevant information and lenders are able to contact the homeowner with information about the types of re-financing options and interest rates they may be able to offer to the homeowner.

Selecting Reliable Resources on the Internet

The Internet is filled with useful information. However, the Internet is also filled with incorrect information. Homeowners should be aware of this fact and should avoid using the Internet exclusively in the research process. This will enable the homeowner to independently verify the information they find online.

One way homeowners can avoid coming into contact with misinformation is to select only reputable websites on the subject of home mortgages. Determining which websites are reputable and which ones are not is not always easy. Website design is a fairly simple process and there are many people who can create a website which looks professional. However, the appearance of the website does not ensure the quality of the content provided on the website. Even the most professional looking website may contain inaccurate information. This may not be intentional but it often occurs when the website owner is quite knowledgeable about website design but is very knowledgeably about the subject or re-financing.

One way to avoid the possibility of being misinformed on the Internet is to rely solely on websites maintained by well known lenders or financial institution. Often the ownership of the website may be difficult to decipher but many well known financial institutions use their name as their domain name and optimize their website for keywords related to their name. This is done to ensure those who search for their name will be directed to their website.

Using Caution on the Internet

It is always wise to use caution when participating in Internet activities. As previously discussed, this involves verifying the information obtained on a particular website. This may be done by using independent resources such as published books or consultations with financial advisors to confirm the Internet research.

Additionally, homeowners should be cautious about divulging sensitive information such as full name, address or social security number. This type of information should only be given to sources which are deemed to be reputable.

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Re-Financing with Bad Credit

Re-Financing with Bad Credit

Many years ago, it would have been extremely difficult for those with bad credit to obtain a mortgage loan in the first place. However, today there are so many loan options available and so many ways for lenders to protect themselves that those with bad credit can not only find a suitable mortgage but can also find appealing re-financing options as well.

Those with poor credit should carefully consider whether or not re-financing is ideal for them at the present time but the process is not much different for them as it is for those with good credit. Those with bad credit who want to learn more about re-financing should consult a mortgage advisor who specializes in mortgages for those with bad credit. Additionally the homeowner should carefully evaluate their credit score and whether or not it has improved. Finally the homeowner should evaluate their options carefully to ensure they are making the best possible decision.

Consult a Mortgage Advisor

Consulting with a mortgage advisor is recommended for those with poor credit. These homeowners may be knowledgeable about the process of re-financing but their situation warrants consulting with an industry expert. This is important because a mortgage advisor who specializes in obtaining mortgages and re-financing for those with bad credit will likely be very knowledgeable about the types of options available to the homeowners.

When consulting with the mortgage advisor, the homeowners should be completely honest about their financial situation and should provide the expert with all of the information he needs to assist them in finding an ideal re-financing agreement. Being completely candid will be very helpful in enabling the mortgage advisor to assist the homeowner in the best way possible.

Consider Whether or Not Your Credit has Improved

Homeowners with bad credit should carefully consider whether or not their credit has improved since the original mortgage was secured. Homeowners who have documented proof of past credit scores can compare these scores to current values. Each citizen is entitled to one free credit report per year from each of the major credit reporting agencies. Homeowners can obtain these reports for use in making comparisons to the previous credit scores. Imperfections on the credit report such as bankruptcies, delinquent or missed payments and other transgressions do not remain on the credit report.

These blemishes are often erased from the credit report after a certain period of time. The amount of time the transgression remains on the report is proportional to the severity of the offense. For example a bankruptcy will remain on the credit report for significantly longer than a late payment. In examining the credit report, homeowners should consider the overall credit score but should also note whether or not previous offenses are being erased from the credit report in a timely fashion.

Evaluate Re-Financing Options Carefully

Once a homeowner has tentatively made a decision to re-finance the mortgage, it is time to start considering the many options that are available to the homeowner during the process of re-financing. Most homeowners mistakenly believe one factor of the re-financing process they have no control over is the interest rate. While this rate is largely dependent on the homeowners credit score, even those with poor credit have the ability to lower their interest rate by purchasing point. A point is typically equally to 1%PRCTG% of the total loan amount and may translate to a ? of a percentage point on the interest rate. When deciding whether or not to purchase points, the homeowner should carefully consider the amount of time it would take the homeowner to recoup the cost of purchasing the points. This will help to determine whether or not it is worthwhile to purchase one or more points when re-financing.

Homeowners will also have options in terms of the type of loan they choose when re-financing. Common options include fixed rate mortgages, adjustable rate mortgages (ARMs) and hybrid mortgages. The interest rate remains constant with a fixed rate mortgage, adjusts with an ARM and is fixed for a period of time and adjustable for the remainder of the loan period with a hybrid loan.

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Does It Pay to Re-Finance?

Does It Pay to Re-Finance?

This is a question many homeowners may have when they are considering re-financing their home. Unfortunately the answer to this question is a rather complex one and the answer is not always the same. There are some standard situations where a homeowner might investigate the possibility of re-financing. These situations include when interest rates drop, when the homeowner?s credit score improves and when the homeowner has a significant change in their financial situation. While a re-finance may not necessarily be warranted in all of these situations, it is certainly worth at least investigating.

Drops in the Interest Rate

Drops in interest rates often send homeowners scrambling to re-finance. However the homeowner should carefully consider the rate drop before making the decision to re-finance. It is important to note that a homeowner pays closing costs each time they re-finance. These closings costs may include application fees, origination fees, appraisal fees and a variety of other costs and may add up quite quickly. Due to this fee, each homeowner should carefully evaluate their financial situation to determine whether or not the re-financing will be worthwhile. In general the closing fees should not exceed the overall savings and the amount of time the homeowner is required to retain the property to recoup these costs should not be longer than the homeowner plans to retain the property.

Credit Score Improvements

When the homeowner?s credit scores improve, considering re-financing is warranted. Lenders are in the business of making money and are more likely to offer favorable rates to those with good credit than they are to offer these rates to those with poor credit. As a result those with poor credit are likely to be offered terms such as high interest rates or adjustable rate mortgages. Homeowners who are dealing with these circumstances may investigate re-financing as their credit improves. The good thing about credit scores is mistakes and blemishes are eventually erased from the record. As a result, homeowners who make an honest effort to repair their credit by making payments in a timely fashion may find themselves in a position of improved credit in the future.

When credit scores are higher, lenders are willing to offer lower interest rates. For this reason homeowners should consider the option or re-financing when their credit score begins to show marked improvement. During this process the homeowner can determine whether or not re-financing under these conditions is worthwhile.

Changed Financial Situations

Homeowners should also consider re-financing when there is a considerable change in their financial situation. This may include a large raise as well as the loss of a job or a change in careers resulting in a considerable loss of pay. In either case, re-financing may be a viable solution. Homeowners who are making considerably more money might consider re-financing to pay off their debts earlier. Conversely, those who find themselves unable to fulfill their monthly financial obligations might turn to re-financing as a way of extending the debt which will lower the monthly payments. This may result in the homeowner paying more money in the long run because they are stretching their debt over a longer pay period but it might be necessary in times of need. In these cases a lower monthly payment may be worth paying more in the long run.

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Seek Recommendations When Re-Financing

Seek Recommendations When Re-Financing

Homeowners who are re-financing their home for the first time may need a great deal of advice to assist them during the process. While homeowner can certainly research the process of re-financing by themselves, this can be a cumbersome task which is difficult, if not impossible. While it might be possible for a homeowner to educate himself enough to make informed decisions, it is unreasonable to expect a homeowner to be up to date on the most current information in the re-financing industry. It would also not be reasonable for homeowners to learn enough to make a definite decision regarding re-financing. The homeowner may still require some direction regarding which options are best suited for the needs of the homeowner.

Fortunately there are two simple steps homeowners can take to tips the odds of obtaining the most favorable re-financing in their favor. These simple steps include consulting with friends and family members who have recently financed and turning to industry experts for assistance.

Consult Friends and Family when Re-Financing

Believe it or not consulting with family and friends is one of the first steps a homeowner should take in the refinancing process. Those reading this article might be somewhat confused by this suggestion because in the previous section we stressed how it would be virtually impossible for a homeowner to thoroughly educate themselves on the re-financing process. Surely, we are not implying every homeowner has a friend or family member who is capable of given detailed financial advice in regard to re-financing. However, friends and family members can be helpful in a different capacity.

Friends and family members who recently re-financed their own home likely did a great deal of research and legwork before making their decision. They also likely formed useful opinions, either negative or positive, about the lender they used in the process. It is this information which can be very useful to homeowners who are considering their own re-financing. Homeowners can obtain information such as which lenders are currently offering the best rates as well as which lenders are easy to work with and responsive to the needs of the homeowners as well as which lenders do not take a vested interest in helping the homeowner to succeed.

Ask Experts for Advice when Re-Financing

One piece of advice which cannot be overlooked when re-financing a home, is asking an expert in the re-financing industry for advice. These experts may have costly consulting fees associated with their assistance but most homeowners would agree these fees are certainly worthwhile especially if the result in a significant cost savings for the homeowner.

We previously stressed how the issues associated with re-financing can be quite complex and difficult for those outside of the industry to fully understand, however, those in the industry spend their days devoted to learning more about re-financing, keeping up to date with changes in the industry as well as new developments and figuring out how to best serve the customers. All of these characteristics make it clear that homeowners should really consider employing the services of a financial planner with a great deal of experience in re-financing when they are making decisions regarding the best re-financing option for their situation.

Again, friends and family members who previously consulted with an industry professional can supply candid opinions about those they met. This can save the homeowner a great deal of time by eliminating potential candidates who friends and family members thought performed poorly.

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When Is It a Mistake to Re-Finance?

When Is It a Mistake to Re-Finance?

Many homeowners make the mistake of thinking re-financing is always a viable option. However, this is not true and homeowners can actually make a significant financial mistake by re-financing at an inopportune time. There a couple of classic example of when re-financing is a mistake. This occurs when the homeowner does not stay in the property long enough to recoup the cost of re-financing and when the homeowner has had a credit score which has dropped since the original mortgage loan. Other examples are when the interest rate has not dropped enough to offset the closing costs associated with re-financing.

Recouping the Closing Costs

In determining whether or not re-financing is worthwhile the homeowner should determine how long they would have to retain the property to recoup the closing costs. This is significant especially in the case where the homeowner intends to sell the property in the near future. There are re-financing calculators readily available which will provide homeowners with the amount of time they will have to retain the property to make re-financing worthwhile. These calculators require the user to enter input such as the balance of the existing mortgage, the existing interest rate and the new interest rate and the calculator return results comparing the monthly payments on the old mortgage and the new mortgage and also supplies information about the amount of time required for the homeowner to recoup the closing costs.

When Credit Scores Drop

Most homeowners believe a drop in interest rates should immediately signal that it is time to re-finance the home. However, when these interest rates are combined with a drop in the credit score for the homeowner, the resulting re-financed mortgage may not be favorable to the homeowner. Therefore homeowners should carefully consider their credit score at the present time in comparison to the credit score at the time of the original mortgage. Depending on the amount interest rates have dropped, the homeowner may still benefit from re-financing even with a lower credit score but it is not likely. Homeowners may take advantage of free re-financing quotes to get an approximate understanding of whether or not they will benefit from re-financing.

Have the Interest Rates Dropped Enough?

Another common mistake homeowners often make in regard to re-financing is re-financing whenever there is a significant drop in interest rates. This can be a mistake because the homeowner must first carefully evaluate whether or not the interest rate has dropped enough to result in an overall cost savings for the homeowners. Homeowners often make this mistake because they neglect to consider the closing costs associated with re-financing the home. These costs may include application fees, origination fees, appraisal fees and a variety of other closing costs. These costs can add up quite quickly and may eat into the savings generated by the lower interest rate. In some cases the closing costs may even exceed the savings resulting from lower interest rates.

Re-Financing Can Be Beneficial Even When It is a ?Mistake?

In reality re-financing is not always the ideal solution, but some homeowners may still opt for re-financing even when it is technically a mistake to do so. This classic example of this type of situation is when a homeowner re-finances to gain the benefit of lower interest rates even though the homeowner winds up paying more in the long run for this re-financing option. This may occur when either the interest rates drop slightly but not enough to result in an overall savings or when a homeowner consolidates a considerable amount of short term debt into a long term mortgage re-finance. Although most financial advisors may warn against this type of financial approach to re-financing, homeowners sometimes go against conventional wisdom to make a change which may increase their monthly cash flow by reducing their mortgage payments. In this situation the homeowner is making the best possible decision for his personal needs.

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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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