It is known as a fact that comprehension of re-financing process can be quite confusing as those who are considering re-financing might initially be overwhelmed by the number of options available to them. However, after spending some time on studying this process, they will likely find it to be not as daunting as they thought. Some of the options available to those interested in re-financing along with important factors to be considered to determine whether refinancing is worthwhile or not, will be discussed in the article.
Consider the Options
Nowadays houseowners have quite a few options available to them when they are considering the possibility of their property re-financing. The most significant decision is to choose the type of the loan. Generally, mortgages the houseowners are likely to encounter include fixed rate mortgages and adjustable rate mortgages (ARMs). Additionally there are hybrid loan options available.
As the name implies, a fixed rate mortgage consists of the interest rate which 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 subjected 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 stated in 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. Thus, homeowner can be protected from sharp increases in the interest rates which would otherwise considerably raise the amount of their monthly payments.
Basically, 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 to re-finance the property or not. This is significant due to the fact that once homeowners re-finance their home they are often subjected to many of the 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 and can be quite significant. It usually occurs when the homeowner considers the overall savings associated with re-financing.
Consider the Overall Savings
Another factor homeowners should carefully consider is the overall savings. This is essential since re-financing is not typically considered worthwhile unless it results in a financial savings. Although, some homeowners refinance their properties to lower monthly costs and are not concerned with the overall picture, as they generally consider whether they will be saving money by refinancing or not.
The amount of money the homeowner will save while re-financing depends on the new interest rate in relation to an old one. It is important to note that the amount of money saved by negotiating over a lower interest rate is not equal to the entire savings. Thereby, the houseowner should determine the closing costs associated with re-financing and subtract this sum from potential savings. A negative number would indicate that new interest rate is not too low to offset the closing costs. Conversely, a positive number indicates an overall savings. Consequently, by considering this information the homeowner can decide whether he wishes to re-finance or not.
Nowadays homeowner may ask himself/herself a question whether to re-finance or not. Re-financing is known as essential withdrawal of one home loan to repay an existing home loan. It is vitally important to realize when this is done properly it can result in a significant cost savings for the homeowner over the course of the loan. When there is the potential for an overall savings re-financing must be considered. There are certain situations which make re-financing worth-while. This article will examine each of these scenarios and discuss why they may warrant a re-finance.
When Credit Scores Improve
It is well known that there are a great number of home loan options available at the present time, that even those with poor credit are likely to find a lender who can assist them in realizing their dream of purchasing a home. However, such people may be offered unfavorable loan terms such as high interest rates or variable interest rates instead of fixed ones. This fact can be explained in the following way: the lender considers these homeowners to be higher risk than others due to their poor credit.
Fortunately, for those who possess poor credit, many credit mistakes can be repaired over time. Some financial blemishes such as bankruptcies simply disappear after a number of years while other defects such as frequent late payments can be minimized by maintaining a more favorable record of repaying debts and demonstrating an ability to repay existing debts.
Moreover, when a homeowner’s credit score considerably improves, he/she should inquire about the possibility of re-financing their current mortgage. All citizens are entitled to a free annual credit report from each of the three major credit reporting bureaus. Homeowners should take advantage of these three reports to check their credit annually and determine whether their credit has increased significantly or not. In case they notice a significant increase, they should consider contacting lenders to determine the rates and terms they may be willing to offer.
When Financial Situations Change
It should be noted that a change in the homeowner’s financial situation can warrant investigation into the process of re-financing. A houseowner may find himself making considerably more money due to a change in jobs or less money because of a lay off or a change in careers. In either case the homeowner should investigate the possibility of re-financing. He/she may find out that an increase in pay may allow them to obtain a lower interest rate.
Hence, a houseowner who loses the job or takes a pay cut as a result of a change in careers may hope to refinance and consolidate his/her debt. This may result in the homeowner’s paying more due to the fact that some debts are drawn out over a longer period of time but can result in a lower monthly payment for the houseowner which may be rather advantageous at this juncture of life.
When Interest Rates Drop
Thus, interest rates dropping may be understood as one of the signals that sends to many homeowners rushing to their lenders a warning to discuss the possibility of re-financing their properties. Lower interest rates are certainly appealing because they can result in an overall savings over the course of the loan but houseowners should also realize that every time the interest rates drop, a re-finance of the home is not warranted. The caveat to implement re-financing as well as to take advantage of lower interest rates are those options that the homeowner should carefully consider. Moreover, it is necessary to evaluate the situation to ensure the closing costs associated with re-financing do not exceed the overall savings benefit gained from obtaining a lower interest rate. This is significant because if the cost of re-financing is higher than the savings in interest, the houseeowner does not benefit from re-financing and may actually lose money in the process.
It may be concluded that the mathematics associated with determining these situations is not overcomplicated but there is the possibility that the homeowner will make mistakes in these types of calculations. Fortunately, there are a number of calculators available on the Internet which can help homeowners to determine whether re-financing is worthwhile or not.
Lots of homeowners thinks that the overall goals of re-financing are often paying less in interest overall. There is usually the opportunity to re-finance the mortgage to capitalize on the lower interest rate when a homeowner is able to obtain a lower interest rate. Anyway, a lower interest rate does not automatically translate to a savings. The homeowner should carefully consider the amount of money they will be savings over the course of the loan in relation to the amount of money they’ll be spending to re-finance the mortgage. Re-financing may not be warranted, when the closing costs associated with re-financing are larger than the savings. Associated with tax options re-financing can have financial ramifications.
Paying Less Interest Equals Less of a Deduction
Homeowners are permitted to deduct the amount of taxes they pay on their mortgage when filing their tax forms. Those who re-finance their mortgage will typically be paying less money each year in taxes on the mortgage.
Consider a situation where a homeowner is located just below a major tax bracket. Re-financing may result in the homeowner paying less money in taxes each year. This means the taxpayer will be able to make a smaller deduction this year now fall above the tax bracket they previously fell below. If this happens the homeowner can find themselves paying significantly more in taxes.
Consult a Tax Preparation Specialist
Determining the exact ramifications of paying less interest on a home mortgage on a tax return can be a rather tricky process. The homeowner must consult a tax preparation specialist when determining whether or not re-financing is worthwhile because the tax specialist may provide information regarding the impact of paying less in interest.
Selecting a tax preparation specialist, the homeowner must seek out opinions from friends and family members if the homeowner does not employ a specialist to prepare their own taxes. Tax preparation specialists must have all of these qualities. This will enable the tax preparation specialist to make all of the right decisions when considering the needs of the homeowner.
Online Calculators
There are online calculators which homeowners might find very useful for homeowners who are unable to afford the consulting services of these individuals. These calculators are readily available throughout the Internet. Also they can be used to determine the tax ramifications to re-financing. These calculators ask the user to input specific criteria, then returns results regarding the amount the homeowner will pay in taxes during the year if he refinances. To consider a number of different scenarios the homeowner can run these equations several times.
Many homeowners make the mistake of thinking re-financing is always a viable option. Anyway this is not true and homeowners can actually make a significant financial mistake by re-financing at an inopportune time. There are some classic examples of when re-financing is a mistake. 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. 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, 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. 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. 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.
Re-Financing Can Be Beneficial Even When It is a “Mistake”
Re-financing is not always the ideal solution, but some homeowners may still opt for re-financing. 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. 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. The homeowner in this situation is making the best decision for his personal needs.
The decision to re-finance a home mortgage is a serious decision. Homeowners should give this decision a great deal of consideration. Few factors to consider when deciding whether or not to re-finance is the type of loan to choose, the lender to choose and the costs associated with re-financing and the hassle of the process.
Consider All of the Options
Homeowners who are seriously considering re-financing owe it to themselves to consider all of the options available to them. They may have a friend who recently refinanced with a specific type of loan. Some of the options to consider include the type of re-financing loan. The basic options are fixed interest rates and adjustable interest rates.
Consider the Lender
Homeowners will also have to carefully consider the lender they select. This is important because not all lenders are going to be willing to offer the same interest rates and terms to the homeowner. Homeowners may have to receive quotes from several different lenders in a short period of time to make an accurate comparison. Selecting a lender the homeowner should also consider how responsive the lender is to their questions. This is important because a lender who does not pay attention to the homeowner or respond to their inquiries in a timely fashion can make the process of re-financing considerably more stressful than necessary. Selecting a lender who offers slightly higher rates but is more responsive may be warranted.
Consider the Cost of Re-Financing
Re-financing is not cheap. There are certain costs associated with re-financing. These costs are typically very similar to the closing costs associated with securing an original mortgage on a property. These costs may include application fees, loan origination fees, property taxes, appraisal fees and other miscellaneous items. These costs can be quite extensive and homeowners may find they are often left paying more than the benefits they are going to gain from re-financing. In this type of situation the homeowner should make the decision not to re-finance because it is not a financially sound decision.
Consider the Hassle of Re-Financing
Let’s face it; re-financing can be an absolute hassle. Time and energy spent researching different re-financing options and contacting lenders to see who will offer the most favorable rates can be quite taxing. A homeowner should consider the time and effort required for this endeavor in deciding whether or not to re-finance. Refinancing is a hassle and homeowners may better spend their time with family rather than running around trying to find the best rates.
Deciding to begin the process of refinancing, all homeowners should ask themselves one important question. And this question will be the next: “Is re-financing always worthwhile?”. 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.
The first step in the process of determining whether or not re-financing is worthwhile will be establishing financial goals. Skipping this step, a homeowner cannot accurate answer the question of the worth of re-financing because of his incomplete understanding of his own financial goals. While making financial goals you will have the basic question to be asked: 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.
Homeowners establishing 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. Paying less interest will result in a greater cost savings.
There is an example for better understanding of that. When a homeowner has an existing debt of $100,000, an interest rate of 6.25% 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.
When homeowner has chosen a goal to increase his monthly cash flow 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 to be able to extend their loan terms. Thereby 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.
There is one more serious and not less important question to answer for those who are interested in investigating the possibility of re-financing. How will re-financing affect tax deductions? The interest paid on a home loan is often tax deductible. A homeowners re-financing 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 reinforced for homeowners who were previously just below a significant tax break line.
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, considering re-financing one should have a tax preparation professional determine the ramifications re-financing will have on their tax return before making decision.
RSS FEED