Financial Tips and Advice

The decision to re-finance a home mortgage is a serious decision which should not be taken lightly. Homeowners should give this decision a great deal of consideration to ensure they are making the best possible decision for their financial situation and personal needs. Some factors to consider when deciding whether or not to re-finance is the type of loan to choose, the lender to choose, 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 but this might not be the solution for all homeowners. Each homeowner should consider their situation to be individual and not likely to closely mirror the situations of others.

Some of the options to consider include the type of re-financing loan. The basic options are fixed interest rates and adjustable interest rates. There are also mortgages which combine these two options. The homeowner may have a specific type of mortgage in mind but the lender may or may not be willing to offer the homeowner this type of loan. Lenders are more likely to offer fixed interest mortgages to homeowners with good credit and adjustable rate mortgages to homeowners with poor credit.

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. This is important because interest rates can change without notice and homeowners who wait too long to make a decision may find the rate they were originally quoted is no longer available to them.

When 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. The 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. Simply stated, refinancing is a hassle and homeowners may better spend their time with family and friends rather than running around trying to find the best rates in town.

A cash out re-finance basically enables the homeowner to re-finance their home for an amount greater than the balance of the exiting mortgage. The homeowners than repay the existing balance plus the additional amount over the course of the loan period and are given a check for the amount above and beyond the balance of the exiting mortgage. The homeowners can use this check for any purpose they choose now and repay the debt along with the rest of re-financed amount.

When is a Cash Out Re-Finance possible?

A cash out option is available when there is existing equity in the home. This is important because the lender is able to justify the practice of offering increased funds to the homeowner due to the value of the property. This is because the lender feels as though the security of having the home for collateral does not put them at a high risk for the homeowner defaulting on the loan.

Homeowners who wish to take advantage of a cash out re-finance offered by a lender should inquire as to whether or not the lender offers this type of re-financing. This is important because not all lenders offer this option. It should actually be one of the first questions the homeowner asks when inquiring about re-financing programs. Doing so will save homeowners, who are seeking a cash out re-finance, a great deal of time.

How Can the Cash be Used?

For many homeowners the most appealing aspect of cash out re-financing is that the additional funds can be used for any purpose desired by the homeowner. The homeowner does not even have to offer the lender an explanation of how the additional funds will be used. This is important because once the lender writes the check for the additional funds, he has no concern for how the money is used. This is because the amount of the additional funds is rolled into the re-financed mortgage. The lender simply focuses on the homeowner’s ability to repay the mortgage and is not concerned with how the homeowner uses the funds which are released in the cash out.

While the purpose of a cash out re-finance does not have to be disclosed to the lender, the homeowner would be wise to use these funds in a judicious manner. This is because the homeowner will be responsible for repaying these funds to the lender. Some of the popular uses for funds collected from cash out re-financing include:

* Undertaking home improvement projects
* Purchasing items for the home
* Taking a dream vacation
* Putting money in a child’s tuition fund or
* Purchasing a vehicle
* Starting a small business

All of the reasons listed above are excellent uses of a cash out re-finance option. Homeowners who are considering this type of a re-financing option should also consider whether or not the deductions are tax deductible. Using the cash out option to make home improvements is jus one example of a situation where the funds can be tax deductible. Homeowners should consult their tax attorney on the matter to determine whether or not they are able to deduct the interest from the repayment of their re-financing loan.

Cash Out Re-Financing Example

The process of a cash out refinancing option is fairly easy to illustrate with a simple example. Consider a homeowner who purchases a $150,000 with a 7% interest. Now consider the homeowner has already repaid $50000 of the loan and would like to borrow an additional $20,000 to make a rather large purchase or invest in a small business. With this additional funding available the homeowners have the opportunity to use the equity in their home to make their dreams come true. In the example above the homeowner may refinance for a total of $120,000 at a lower interest rate such as 6.25%. This process allow the homeowner to take advantage of the existing equity in their home and also allows the homeowner to qualify for a substantial loan at a rate typically reserved for re-financing or home loans.

Many homeowners make the mistake of thinking re-financing is always a viable option. However, this is not true and homeowners can actually make a significant financial mistake by re-financing at an inopportune time. There a couple of classic example of when re-financing is a mistake. This occurs when the homeowner does not stay in the property long enough to recoup the cost of re-financing and when the homeowner has had a credit score which has dropped since the original mortgage loan. 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 to recoup the closing costs. This is significant especially in the case where the homeowner intends to sell the property in the near future. 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 such as the balance of the existing mortgage, 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. Therefore homeowners should carefully consider their credit score at the present time in comparison to the credit score at the time of the original mortgage. Depending on the amount interest rates have dropped, 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 whenever there is a significant drop in interest rates. 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. These costs may include application fees, origination fees, appraisal fees and a variety of other closing costs. These costs can add up quite quickly and may eat into the savings generated by the lower interest rate. In some cases the closing costs may even exceed the savings resulting from lower interest rates.

Re-Financing Can Be Beneficial Even When It is a “Mistake”

In reality re-financing is not always the ideal solution, but some homeowners may still opt for re-financing even when it is technically a mistake to do so. 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. This may occur when either the interest rates drop slightly but not enough to result in an overall savings or 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 to make a change which may increase their monthly cash flow by reducing their mortgage payments. In this situation the homeowner is making the best possible decision for his personal needs.

Choosing a lender is a very important part of the process of re-financing a home. Understanding the different re-financing options and knowing how each of these options work is very important but none of this matters at all if the homeowner is unable to find a lender who is willing to offer them the rates and terms they are seeking. Choosing a lender can be a long and difficult process but there are some ways to make it easier. One simple way to make it easier is to ask for advice from friends or family members who recently re-financed. Additionally, homeowners can do their own research to determine which lenders are able to offer them the best rate. Finally the homeowner should determine whether or not the finances should be the governing factor in choosing a lender. Surprisingly enough, in most cases it is not.

Ask for Advice from Friends and Family Members

Friends and family members who recently refinanced can be a homeowner’s most valuable resource in the process of selecting a lender. These friends and family members are so valuable because they will most likely be willing to offer you a quite candid opinion of the lender they used. This opinion may be either positive or negative but in either case it is useful to the homeowner. If the opinion is negative the homeowner can remove this lender from their list of lenders to consider. Conversely if the lender comes highly recommended, the homeowner may consider this lender more carefully.

Comparison Shop

Homeowners who want to know which lender is offering them the best interest rate and financial terms should do a great deal of comparison shopping. The homeowner may even consider requesting quotes from each and every lender. This should make it perfectly clear which lenders are willing to offer the homeowner more favorable rates. When comparing these quotes all of the factors should be considered to ensure the quotes are being compared fairly. For example each quote should be broken down to determine the monthly savings, total savings, etc. All of this statistical data will make it much easier for the homeowner to make a wise decision when the time comes.

Consider More than Finances

Finally, while interest rates, loan terms and other financial matters are all certainly important none of these are more important than being treated fairly by the lender. For this reason, the homeowner should carefully consider all of their lenders and should determine whether or not they feel as though the lender is responsive to his needs. For example, a lender who does not return calls in a timely fashion or answer questions truthfully and accurately may not be the ideal lender for a homeowner even if he is the lender who is offering the most favorable rates.

Additionally, homeowners should trust their instincts regarding their trust in the lender. Some lenders simply do not appear to know what they are talking about. Homeowners might be inclined to avoid these individuals because they may end up doing more harm than good during the re-financing process. Conversely some homeowners may be immediately impressed by the honesty and intelligence of another lender. In most cases, the homeowner would likely choose the second lender as long as the rates offered by each lender were comparable.

There are a number of benefits which may be associated with re-financing a home. While there are some situations where re-financing is not the right decision, there are a host of benefits which can be gained from re-financing under favorable conditions. Some of these benefits include lower monthly payments, debt consolidation and the ability to utilize the existing equity in the home. Homeowners who are considering re-financing should consider each of these options with their current financial situation to determine whether or not they wish to re-finance their home.

Lower Monthly Payments

For many homeowners the possibility of lower monthly payments is a very appealing benefit of re-financing. Many homeowners live paycheck to paycheck and for these homeowners finding an opportunity to increase their savings can be a monumental feat. Homeowners who are able to negotiate lower interest rates when they re-finance their home will likely see the benefit of lower monthly mortgage payments resulting from the decision to re-finance.

Each month homeowners submit a mortgage payment. This payment is typically used to repay a portion of the interest as well as a portion of the principle on the loan. Homeowners who are able to refinance their loan at a lower interest rate may see a decrease in the amount they are paying in both interest and principle. This may be due to the lower interest rate as well as the lower remaining balance. When a home is re-financed, a second mortgage is taken out to repay the first mortgage. If the existing mortgage was already a few years old, it is likely the homeowner already had some equity and had paid off some of the previous principle balance. This enables the homeowner to take out a smaller mortgage when they re-finance their home because they are repaying a smaller debt than the original purchase price of the home.

Debt Consolidation

Some homeowners begin to investigate re-financing for the purpose of debt consolidation. This is especially true for homeowners who have high interest debts such as credit card debts. A debt consolidation loan enables the homeowner to use the existing equity in their home as collateral to secure a low interest loan which is large enough to repay the existing balance on the home as well as a number of other debts such as credit card debt, car loans, student loans or any other debts the homeowner may have.

When re-financing is done of the purpose of debt consolidation there is not always an overall increase in savings. Those who are seeking to consolidate their debts are often struggling with their monthly payments and are seeking an option which makes it easier for the homeowner to manage their monthly bills.

Additionally, debt consolidation can also simplify the process of paying monthly bills. Homeowners who are apprehensive about participating in monthly bill pay programs may be overwhelmed by the amount of bills they have to pay each month. Even if the value of these bills is not worrisome just the act of writing several checks each month and ensuring they are sent, on time, to the correct location can be overwhelming. For this reason, many homeowners often re-finance their mortgage to minimize the amount of payments they are making each month.

Using the Existing Equity in the Home

Another popular reason for re-financing is to use the existing equity in the home. Homeowners who have a considerable amount of equity in their home may find they are able to cash out some of this equity for other purposes. This may include making improvements to the home, starting a business, taking a dream vacation or pursuing a higher degree of education. The homeowner is not limited in how they can use the equity in their home and may re-finance a home equity line of credit which can be used for any purpose imaginable. A home equity line of credit is different from a loan because the funds are not disbursed all at once. Rather the funds are made available to the homeowner and the homeowner can withdraw these finds at anytime during the draw period.