| refinance, mortgage | 8 Apr 2008 12:00 AM |
| What is a refinance and what do I need to consider when thinking of a refinance? by Michelle Kour | |
A refinance is the process whereby you repay your existing home loan by taking out a new loan. When they refinance borrowers take out a new loan to completely pay out early and thus replace their existing/previous loan.
With home loans being the most significant financial commitment of a lifetime for a lot of people, and with home loans rates being on the move, a lot of borrowers start considering a refinance, especially if they are thinking that they are not getting the best mortgage deal possible with their current lender. By choosing to refinance their mortgage they may be able to obtain a better deal which offers quite significant savings.
There are a lot of things people hope to achieve as a result of a refinance. They hope to improve their financial situation, reduce their debts, obtain lower interest rates, save on monthly payments, consolidate other existing debts into one mortgage by refinancing into a loan with a higher loan amount but better overall cash flow position, and then using the difference to pay off other debt, clear their arrears, pay off their mortgage faster, possibly make home improvements.
Though intentions of the borrowers are good, it doesn't necessarily mean that it will be wise for them to refinance immediately. They have to consider all the pros and cons of a refinance and should start by learning how long it will take for them to recoup their closing costs (exit penalties for paying off their existing mortgage before its maturity) as well as refinance fees on the new home loan and much will depend, in this situation, upon the terms of their original mortgage. It may not be profitable for them to refinance, because even though they might get a lower rate on their new mortgage the costs for exiting early are such that when added to the lower interest rate – well the annual interest rate for at least 2 years may in fact be higher than the existing loan.
Borrowers need to make sure that they completely understand the terms of the new loan. Sometimes, borrowers can be easily enticed by the lower interest rates, though they represent a very small portion of the much bigger picture. They may end up having a bigger loan, due to all loan costs being added to the loan itself and may be persuaded to take a longer term with the mortgage broker recommending this course because it reduces the monthly loan repayments. This may be so but over the term of the loan you will pay considerably more in interest.
Quite often borrowers choose to do an “internal” refinance of their mortgage loan with their existing lender, which significantly shortens the application process and also saves their time and money. If you have a good relationship with your current lender and feel like a valued customer then why not see what your current lender can offer you. If borrowers have a clear repayment history (all their repayments are up-to-date) there may be no need to undergo another credit check or employment verification. The process should be pretty quick because you are known to your lender – they are keen to retain your business.
Borrowers do need to analyse their situation carefully and effectively, to "shop around" and compare a wide variety of different loan products, their facilities, rates, all costs involved before proceeding with a refinance.
With home loans being the most significant financial commitment of a lifetime for a lot of people, and with home loans rates being on the move, a lot of borrowers start considering a refinance, especially if they are thinking that they are not getting the best mortgage deal possible with their current lender. By choosing to refinance their mortgage they may be able to obtain a better deal which offers quite significant savings.
There are a lot of things people hope to achieve as a result of a refinance. They hope to improve their financial situation, reduce their debts, obtain lower interest rates, save on monthly payments, consolidate other existing debts into one mortgage by refinancing into a loan with a higher loan amount but better overall cash flow position, and then using the difference to pay off other debt, clear their arrears, pay off their mortgage faster, possibly make home improvements.
Though intentions of the borrowers are good, it doesn't necessarily mean that it will be wise for them to refinance immediately. They have to consider all the pros and cons of a refinance and should start by learning how long it will take for them to recoup their closing costs (exit penalties for paying off their existing mortgage before its maturity) as well as refinance fees on the new home loan and much will depend, in this situation, upon the terms of their original mortgage. It may not be profitable for them to refinance, because even though they might get a lower rate on their new mortgage the costs for exiting early are such that when added to the lower interest rate – well the annual interest rate for at least 2 years may in fact be higher than the existing loan.
Borrowers need to make sure that they completely understand the terms of the new loan. Sometimes, borrowers can be easily enticed by the lower interest rates, though they represent a very small portion of the much bigger picture. They may end up having a bigger loan, due to all loan costs being added to the loan itself and may be persuaded to take a longer term with the mortgage broker recommending this course because it reduces the monthly loan repayments. This may be so but over the term of the loan you will pay considerably more in interest.
Quite often borrowers choose to do an “internal” refinance of their mortgage loan with their existing lender, which significantly shortens the application process and also saves their time and money. If you have a good relationship with your current lender and feel like a valued customer then why not see what your current lender can offer you. If borrowers have a clear repayment history (all their repayments are up-to-date) there may be no need to undergo another credit check or employment verification. The process should be pretty quick because you are known to your lender – they are keen to retain your business.
Borrowers do need to analyse their situation carefully and effectively, to "shop around" and compare a wide variety of different loan products, their facilities, rates, all costs involved before proceeding with a refinance.
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