Refinancing a loan is simply the process of paying off your current loan with a new loan plan, which has a lower interest rate.
How can you negotiate to get the best borrowing rate? First, it starts with a strong credit score. You can achieve this by paying your bills on time, cutting back on borrowing and maintaining a low loan balance by as much as 30% of your limit.
Moreover, by using the equity of your home in refinancing the existing loan, you gain two significant advantages. One, because you made your home the collateral, you will be able to secure a bigger loan, and second, your interest fees are tax deductible.
Which of the two types of refinancing should you consider? A home equity line of credit is a form of revolving credit, wherein your credit limits are the maximum amount you are entitled to borrow at any one time.
A second mortgage closed-end loan, on the other hand is a loan you where you receive all the funds once the loan contract has been signed. You repay the loan defined by a set amount over a fixed period of time.
You can make a better decision on which type of credit to choose by first gathering all the information you have available to you: theterms and conditions of the home equity credit line- derived from the annual percentage rate (APR), and the costs associated for securing the loan and prepayment penalty, if there is one. Then compare this data with the second mortgage APR, including any other charges presented in the financial papers.
The fees outlined below are some of the most common charges:
Loan Application Fee This fee is required for the initial processing of your loan request and for checking your financial and credit history, the house’s equity, and any other information that the lending institution finds valuable. In addition, if you are not borrowing from your original lender, you will have to submit documents concerning your present mortgage. Some of these items are common documents to submit: information about your current lender, outstanding mortgage balance, amount of your monthly payment, status of your property tax and any insurance payments.
Loan Origination Fees and Points. This fee is paid to the lender for evaluating and preparing your mortgage loan. A point refers to the prepaid finance charges imposed by the lender at closing to increase the lender's yield beyond the stated interest rate on the mortgage note.
Escrowed Funds - funds set aside to for payment of taxes or insurance that is due.
Prepayment Penalty. This is the practice of a lending institution charging the borrower for an early pay off. Always check your contract to see if the clause exists.
Title Search and Insurance
This is meant to ensure you are receiving a “marketable title”. You may get a price break by opting to buy a combined lender/owner policy or "reissue" policy.
Finally, consider refinancing your current mortgage if the following seems applicable to you:
Are the savings to be generated from refinancing the loan significant? If your mortgage’s current interest rate is at least 2 percentage points higher than the prevailing market rate, then you should avail of a refinancing loan. For this is the acceptable safety margin, in balancing the costs of refinancing your mortgage against the savings.
What is considered an acceptable length of time to live in your house before you can realize significant savings? Some financial experts have determined three to five years. It doesn’t make much sense to realize 2 years into your home occupancy, and you will find a harder time finding a lender who will work with you.
Remember, the safe bet to consider before you opt to refinance is to do your financial research. A little due diligence goes a long way to big savings.
Ben Anton lives in Portland, OR.
Ben works for a web design and marketing company named Labworks Design.Com. Labworks specializes in all aspects of online marketing, branding and professional web design.
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