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Mortgage Refinancing Guide


Find out when and how to act

Step 1: Decision Process  | Step 2: Preparation | Step 3: Loan Options

Step 1: Deciding if you want to give home equity loan refinancing a try.
Your choice to refinance rests on several factors. Before you decide to refinance, ask yourself the following questions: What is the length of time you have owned your current home? Do you foresee not being a homeowner any time soon? What has your credit history done since obtaining your original mortgage? Will the refinancing savings outweigh the costs of refinancing? What happens if your loan is paid off before its term is up?  Will you be penalized?

Why would you want to refinance in the first place?

The majority of people refinance in order to lower their monthly loan installments.  Especially, if home equity loan rates have dropped drastically since you signed your original mortgage, you should be eligible to slash your monthly payments way back.  But this is not the only reason people refinance - There are many other justifiable causes worth pursuing.

Let's say you desire to tap into the equity your home has built up since you first purchased it. In this scenario, you can take part in a "cash-out refi".  This is when you take out a new home equity loan based on your home's most current appraisal.  You then pay off the remaining balance on your old mortgage and cash out the difference.

You might even desire to reduce the lifetime of your home equity loan.  This can be done by exchanging your current mortgage to one of half the length (a 30-year to a 15-year mortgage). Assuming home equity loan rates have dropped low enough - which they have - it is possible to reduce the length of your loan without increasing your current monthly installment.  

Another popular reason worth refinancing is exchanging an Adjustable Rate Mortgage (ARM) to a fixed rate mortgage.  Now, that home equity loan rates are extremely low, this might be a great idea - before the rates rise again.  Then again, considering that introductory ARM's are usually lower than fixed mortgage rates, if you foresee the rate not rising any time soon, this is another viable refinancing option.  However, if you already have an ARM and you foresee a drastic increase in it, you can exchange your current ARM for another ARM with a much lower introductory rate.  Since there are so many options, make sure you talk them over with somebody who knows the refinancing business.

The Time To Refinance
Nowadays, since "no-cost" refinancing is available, the old rule that said to only refinance when the rate was down two points is no longer applicable.  Remember, however, the term "no-cost" can be misleading because all it means is that you will not have to pay fees during closing.  The closing fees still exist - They are just added into the loan itself, or, they are mixed into the home equity loan rate - thus making it higher than normal. 

The determining factor, however, is whether you will reacquire your refinancing costs in a timely manner.  In other words, calculate what you will be saving per month and compare that to the up front costs of refinancing your mortgage.  How many months will it take until you break even?  Will that be too long of a duration in order to meet your needs?  Do you plan to still be residing in your home for that long or is it too far off to tell?  Make sure you answer these questions as honestly and unbiased as possible.  If you do determine that you are planning to reside in your current home for a definite length of time, refinancing your mortgage is a wise decision. 

The Time Not to Refinance
The biggest issue to consider when exploring the reasons not to refinance is the duration that you have been paying off your current mortgage.  In other words, the longer you have been paying your current mortgage, the less propitious are the benefits of home equity loan refinancing.  However, even if you only have a couple years left to pay on your mortgage, if there is a great difference between new mortgage rates and your original rate, it may still be well worth the effort to refinance.  Just remember to do the math before making your verdict.

Keep in mind that your house payments in the beginning phase of your mortgage are practically  all interest.  Even though interest is tax deductible, it still means you will be paying for it - There is no such thing as 100% tax deductible insurance. Sure, each dollar you fork over in interest is deductible on your tax return; However, what you save in taxes corresponds to your particular tax bracket. For instance, if you fall in the 31 percent bracket, you are only eligible to write-off thirty-one cents, rather than an entire dollar.  

The only sure method of circumventing this problem is to exchange your mortgage with one whose term is half the length of the original term.  Although you will not be saving as much by the month, your savings in the long run will be thousands of dollars greater due to lowered interest costs.

A further consideration is to check for an early-payment clause in your current mortgage, which would penalize you for paying off your mortgage before the end of its term. 

The timeframe for this clause is generally restricted to no more than two years before the end of the loan, although some lenders will only restrict you to five years.  The penalty fee also varies.  Sometimes it might be a predetermined percentage of whatever the remaining balance on the loan happens to be, while other times it may just be one month's worth of interest.  The reason many lenders include this in their loans is to guarantee them a profit gain, whether or not you pay the loan off early.  In return, the lender will normally cut the home equity loan rate down slightly.

Make sure you look for this clause in your mortgage contract.  If it is in there, it should state the amount and method of penalization, as well as the penalty time period.  Remember, any loans granted or backed by the government are prohibited in issuing early-payment clauses.

How Much Will Refinancing Cost Me?
Since refinancing essentially equates to writing up another loan from scratch, you can expect to pay fees similar to what you did when closing your initial loan.  These fees will probably include appraisal fees, title insurance fees, a title search (there are exceptions to this), loan origination fees, as well as new application costs. 

Remember, the key to cutting down your costs is by driving a hard bargain.  Always try to work something out with the lender of your original mortgage - They will want to keep your business, and should be willing to waive some fees if you cajole them.  Do the same with other lenders.  Use whatever quotes you get as bargaining tools with them.  They will probably waive fees if they see that their competition did as well.  Even if you cannot get the fees waived, if you pay them off initially, you will most likely get the lowest home equity loan rate possible.  

If you would rather not pay closing costs at all, you may do so by electing a slightly higher interest rate (Do the math first and see if it will save you in the long run). Or, you can roll the fees into the refinanced mortgage and pay them off over time. 

Step 1: Making a Decision | Step 2: Be Prepared | Step 3: Loan Choices

Home Equity Loan Refinancing Guide

Home Equity Loan Refinancing Economic Terms & Definitions
Home Equity Loan Refinancing Refinance Mortgage 101
Home Equity Loan Refinancing Refinance Options
Home Equity Loan Refinancing Refinancing? Save $$ On Title Insurance
Home Equity Loan Refinancing Should You Refinance?
Home Equity Loan Refinancing When to Refinance?
Home Equity Loan Refinancing Step 1: Making a Decision
Home Equity Loan Refinancing Step 2: Be Prepared
Home Equity Loan Refinancing Step 3: Loan Choices


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