Mortgage Refinancing
Refinancing is basically what you do to get access to the equity in your property. In a way, you convert the equity to cash.
Refinancing is a necessity for some people because they need some extra money for the house. They have a need and want to make use of some of the equity that has built up in their property. The result is that they negotiate for a new mortgage - at a higher amount than they had before.
Also, it could be that your interest rate on your mortgage is rather high, and you want to refinance to lower the rate. If you took a mortgage when your credit rating was poor, and you've now improved your credit through a good track record of payments, you should refinance. In a variable interest rate market where rates are dropping and you are locked in at a much higher rate, it can be advantageous to pay those penalty clauses and get a better interest rate.
The best reason to refinance is to lower interest rate and consolidate your debt. Of all the reasons to refinance, this one in which you definitely benefit. If you have incurred lots of credit card debt and find yourself over your head, refinancing may get you out of the hole and reposition you to turn your financial situation around.
Irrespective of your reason for wanting to refinance, weigh all the pros and cons carefully.
Be sure you are lowering your overall interest costs when you do. Check this even when you want to refinance to get access to money to renovate. If you have the option to buy your materials via a no interest deal with a home renovation store, refinancing may not really benefit you. Most large home renovation stores have credit cards giving you 6 months of no interest. The trick is to be willing to pay the purchase off in that time period, or pay a much-higher credit card interest rate.
Generally, the "cheaper" the cost of borrowing is, the better for you. If you take a credit card and find that you won't be able to pay it off before the no interest period is over, you should consider refinancing. It will save you a lot of money over any credit card debt.
Refinancing at Renewal
Your mortgage payment is due. You have been called by your lender, and offered that they can handle your business - you've been a good customer. They invite you to come in, sign some papers and get it done; so, you book an appointment and you go in, without another thought.
This seems like the right step to take right? No.
When it is time to renew your mortgage, shop around and understand interest rates. It might good for you to move your mortgage to another lender - particularly if your lender’s competition is offering lower interest rates. When there is competition, other companies competing for your business offer other benefits you aren't getting now - including paying any fees associated with transferring your mortgage.
Does moving your mortgage mean a lot of stress? Not if you do homework.
First, check your current mortgage to know if there are any fees associated with moving your mortgage. Once you know there are some costs to you, look for lenders who pay those fees.
Second, do some shopping around. Is your current lender giving you a great rate? If you find other that they are, there is no need to move. Go ahead and renew. But, if you get lower rates elsewhere, then you should move, particularly if your mortgage is for a large amount or you have many years on it. Why? It’s because the long term costs of your mortgage are results of the interest payments over the loan’s lifespan. The more you save in interest in the early part of your mortgage (when the amount owing is still high) the less it will cost you over time. If your mortgage is for a very small amount, or you will pay up your mortgage in 5 years or less, and you are saving less than percent, there is no reason to move your mortgage.
Third, are you getting other options you want? Does your mortgage let you to make lump sum payments whenever you want? The open ability to pay extra, from as little as $100 to 10 or 15 percent of the mortgage value makes a huge difference in the long term costs to you. Every extra payment you make is money directly to the 'principal' of the loan – meaning you are paying interest on smaller loan!
While it takes some level of work, if you make the mortgage lenders compete for your business, you will do better.
Refinancing for Credit Problems
In this day of high consumer debt, a lot of people will love to be debt-free.
Refinancing is a tried and true solution for high interest costs on credit cards and consumer debts. With credit cards, once you have submitted a payment late, the level of interest you have to pay can be punishing. There have been examples of about 30% interest on a late payment. You have to read the fine print with credit cards.
There have also been people who have got into their credit card problems. While credit cards are a
modern day "convenience" and a lot of transactions are easier to do with them, these cards have become a source of serious difficulty for many. Many economists are now sounding alarm on consumer credit now that the US is averaging more money on credit cards than her per capita income. If we spend more than we make, no matter how you add that up, it is unsustainable.
With this said, refinancing for credit card debt is not what you should do without help. Lenders punish' the person in this situation with high interest rates, and other fees. If you are in this situation, seek a reputable credit counselling organization to act as your advocate. A lot of these guys can work with you and with reputable lenders to help consolidate your debt and have you come out paying lower payments while getting the debt paid off faster than you would have otherwise.
Does any of these scenarios sound familiar? Take prompt action now because credit problems get worse before they get better. The earlier you call for help, the sooner you will be moving in the right direction with your finances. Reputable credit-counselling agencies can help your financial situation get better faster.
In the long run, you don't want to lose your home if you own one. If you own a home, you are in a better position than many who are fighting with credit problems. You can use that home to help boost you out of the hole. Do it now.
Refinancing for Extra Cash
With the cost of homes, it's often better to buy what you can afford and remodel later!
Once you are ready to remodel, particularly if you've lived in the house for a few years or have some equity built up, you may find that your best option is to refinance.
Most lenders are willing to discuss refinancing to get you some more money. What they are really doing is looking at the current value of your home versus the amount you have mortgaged, and they give you some cash back from the difference. This means that your mortgage gets bigger - and the cash difference comes to you.
This can be a better deal than negotiating for a separate home improvements loan, but be careful! You always have to read the fine print:
1. First, be sure that you will not be paying fees to do this. Your mortgage lender already has your business, right? You are offering them MORE business, right? As long as you are a good customer, they should be thanking you! You are going to make them money. At worst, fees should be minimal, as long as your credit rating and history are good.
2. Second, be sure that the interest rate for your new mortgage is fair. Do some homework, and ensure that just because you are refinancing doesn't mean that your lender is taking an opportunity to get more out of you.
3. Be sure when you are comparing interest rates that you also look at the rates of home improvement loans. You may actually be better off to have a separate home improvement loan. However, it depends on whether you can handle the amount of the home improvement loan, as well as interest rate. Home improvement loans are often over much shorter periods than a mortgage. Therefore, even if the interest rate is much lower, you may have a payment which is too high for you to handle. So, you'll need to know both interest rates AND payment amounts to compare home improvement loans with mortgage refinancing.
4. Be sure that your mortgage lender knows that you are comparing options. If you want your lender to compete for your business, you should be knowledgeable. Don't be browbeat into something because they are 'doing you a favour'.
Once you have your cash in hand - happy renovating!
Refinancing to Reduce Interest Rate
Yahoo! The rates are dropping! But you've still got 3 years on your mortgage and you're paying a couple percentage points more than the going rate.
What to do?
Your best option is to approach your current lender and try to get an 'early renewal' on your mortgage.
Some lenders will charge a penalty for early renewal. You will have to determine if the cost of the penalty is less than the savings you will get with the new mortgage. If not - you'll be best to wait.
Some mortgage lenders will renew early without penalty, but will give you a 'blended rate'. What this means is you will have a 'new' mortgage, and you will be paying a rate that is a 'blend' of your existing interest rate and the new current interest rate.
Confused? Don't worry. While it is a bit complex, it boils down to this - based on the term picked for the 'renewal' and the time left on your current mortgage, the lender will 'blend' the two interest rates. So you will be paying a 'blend' of your existing rate and the new lower rate. While you won't get a rate as low as the lender's current best rate, you should find that you will be paying a lower rate overall than if you'd stayed at your existing interest rate.
Again, do your homework. This is only a good deal if you have a fair amount of time left on your mortgage, and you are confident that interest rates won't fall a lot further! If interest rates continue to go down, and you are now locked into a longer term at the blended rate, you may find that it wasn't a good deal.
Still confused? Talk to a financial planner or advisor. They can take all the confusion out of this.
When is it Smart to Refinance?
The right time to refinance is when it will save you money. It's as simple as that.
However, it normally saves you money in the long run. In the short run, it's likely going to cost you money. Your costs could be penalties for refinancing, including points, fees, a new property appraisal (if required), and potentially title insurance. If you move from one lender to another, you can definitely expect to need an appraisal and title insurance. If you can refinance with your current lender, you may be able to avoid some costs, but this will depend on your lender and what that lender is willing to waive.
So, when will you most likely save money? There are three basic scenarios that generally work in your favour:
1. Interest rates are dropping, and you are locked in at a rate more than 1.5 % higher than the current rate.
2. You can reduce your overall monthly payments enough to offset any costs of refinancing penalties.
3. You have credit card debt that is not getting paid off, your payments are too high, and you are finding yourself in financial difficulty. (This is an extended circumstance of point #2.)
Let's look at the first scenario. You're locked into an interest rate that is too high. How can you be sure you'll save over the long run if you refinance? You'll have to look at the type of mortgage you have. If you have an ARM (most folks do) then you'll want to compare the lifetime caps of your mortgage versus today's ARMs to determine if your rate is high enough to justify refinancing. Also, the likelihood of saving money increases if you plan to hold onto your property for at least 5 years. If you are planning on moving in the next year or so, refinancing may not be the best option.
What's at issue is how long it will take to recoup the costs of refinancing and start to see a dollar benefit back to you. Let's say you've added up all the costs, and you've got a number of $3000. However, refinancing actually saves you $150 a month. It looks as if you'll have made back the costs in 20 months and your saving will then be yours. But, you have to be careful when calculating your benefits. There are catches.
The biggest is that you'll lose tax benefits by refinancing. Interest paid on your mortgage is tax deductible. If you are paying less on your mortgage, you'll also be claiming less on your taxes. As a result, depending on your tax bracket, some of your savings will be "clawed back" in tax. In fact, if your federal tax rate is 28 %, and you use the scenario we've used here, your real savings will be $108 a month (once your income tax changes are factored in). So, it will actually take you 28 months to get your costs back.
So, keep in mind the changes to your taxes when you are thinking about refinancing, and this will give you a true picture of the benefits to you.
It's the same calculation if you are refinancing to reduce your overall monthly payments, either by rolling credit card debt or other consumer debt into your mortgage. The overall costs should eventually "pay back" any cost to the refinancing. However, if you are doing this to avoid bankruptcy, then you need to consider your financial health first, and recouping y
