Northern Texas Residential Financing
Refinancing refers to applying for a secured loan intended to replace an
existing loan secured by the same assets. The most common consumer refinancing
is for a home mortgage.
Advantages
Refinancing may be undertaken to reduce interest costs (by refinancing at a
lower rate), to pay off other debts, to reduce one's periodic payment
obligations (sometimes by taking a longer-term loan), to reduce risk (such as by
refinancing from a variable-rate to a fixed-rate loan), and/or to liquidate some
or all of the equity that has accumulated in real property during the tenure of
ownership.
In essence, refinancing a mortgage or other type of loan can lower the monthly
payments owed on the loan either by changing the loan to a lower interest rate,
or by extending the period of loan, so as to spread the re-payment out over a
long period of time. The money saved can be used to pay down the principal of
the loan, thus further reducing payments. Alternately, refinancing can be used
to transform available equity in one's house into ready cash, available for
other purposes or expenses.
Another use of refinancing is to reduce the risk associated with an existing
loan. Interest rates on adjustable-rate loans and mortgages shift up and down
based on the movements of the various prime rates used to calculate them. By
refinancing an adjustable-rate mortgage into a fixed-rate one, the risk of
interest rates increasing dramatically is removed, thus ensuring a steady
interest rate over time.
Refinancing a loan or a series of debts can assist in paying off high-interest
debt such as credit card debt, with lower-interest debt such as that of a
fixed-rate home mortgage. The net savings between the two interest rates can
then be applied either towards further paying down the debt, or other purposes.
In addition, non-tax deductible debt, such as credit card or car loan debt, can
be transformed into tax-deductible debt such as home mortgage debt, potentially
lowering one's taxes or shifting one into a more advantageous tax bracket. This
type of arrangement is often associated with a Cash-Out Refinance.
Risks
Certain types of loans contain penalty clauses triggered by an early payment of
the loan, either in its entirety or a specified portion. In addition, there are
also closing and transaction fees typically associated with refinancing a loan
or mortgage. In some cases, these fees may outweigh any savings generated
through refinancing the loan itself. Typically, one should only consider
refinancing if one stands to save a substantial amount of money from doing so,
either in the short or long-term, or if there is a need to extend the loan in
order to pay for unexpected costs such as medical expenses.
In addition some refinanced loans, while having lower initial payments, may
result in larger total interest costs over the life of the loan, or expose the
borrower to greater risks than the existing loan, depending on the type of loan
used to refinance the existing debt. Calculating the up-front, ongoing, and
potentially variable costs of refinancing is an important part of the decision
on whether or not to refinance.
Points
Point (mortgage)
Refinancing lenders often require an upfront payment of a certain percentage of
the total loan amount as part of the process of refinancing debt. Typically,
this amount is expressed in "points" (also sometimes called "premiums"), with
each "point" being equivalent to 1% of the total loan amount. Therefore, if the
refinance option selected involves paying three points, then the borrower will
need to pay 3% of the total loan amount upfront. Most refinancing lenders offer
a variety of combinations points and interest rates. Paying more points
typically allows one to get a lower interest rate than one would be capable of
getting if one paid fewer or no points. Alternately, some lenders will offer to
finance parts of the loan themselves, thus generating so-called "Negative
points" (also called discounts).
The decision of whether or not to pay points, and how many points to pay, should
be taken in consideration of the fact that with points, one tends to trade a
higher upfront cost in exchange for a lower monthly premium later on. Points can
be paid out of the cash saved by refinancing the loan in the first place.
Types
No-Closing Cost refinances: This refinance option reduces greatly upfront fees.
You will pay few upfront fees to get your new mortgage loan. In fact as long as
the prevailing market rate is lower than your existing rate by 1.5 percentage
point or more, it is financially beneficial to refinance because there is little
or no cost in doing so.
Cash-Out Refinance: This type refinance may not help you lower the monthly
payment or shorter your mortgage periods. It can be used for home improvement,
credit card and other debt consolidation if you qualify with your current home
equity; you can refinance with a loan amount larger than your current mortgage
and keep the cash difference.
Contact Information
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