Refinancing a home loan is a pretty big deal. Many people enter into this process with high expectations. They might want lower interest rates or lower monthly mortgage payments but all borrowers have to account for the often considerable, administrative fees that the refinancing process entails. These are the monies that your lender will charge to have your new loan underwritten. If they wind up being too high in comparison to the related interest savings, it could take a very long while for you to break even, much less claim any gains. Following are all of the things to look out for when refinancing.
REFINANCING TO SAVE YOUR HOME
For some borrowers, the refinancing process is one of necessity, rather than being a mere attempt to appeal for more desirable loan terms. If your primary goal is to secure a more manageable payment, you’ll have far fewer considerations to make and probably a lot less time to make them. Your broker can help you find the funding products that will produce the greatest dip in your regular overhead so that you can avoid late payments and even foreclosure after continued default. What you will need to be cognizant of in these instances, is the average closing times for loans, particularly if you have already fallen behind.
YOUR AMORTIZATION CLOCK
Be mindful of the fact that refinancing will automatically reset your amortization clock back to zero. Each time you make a mortgage payment, a portion of this payment is applied to the principal balance and the remainder is put towards your interest. When you start paying on a home loan, a greater percentage of your loan payments will be applied to interest in comparison to the amount that is applied to the principal. The longer that you continue paying down your loan, however, the less disproportionate this balance becomes so that over time, your payments are largely applied to the principal and far less is being applied to interest. This process is called amortization. Ultimately, it means that the more loan payments you make, the more of your home your actually own. Restarting the amortization clock usually makes the best sense for borrowers who need rapid adjustments in their overhead or who intend to be in their properties for quite some time. Refinancing basically puts you back to square one. With this in mind, you have to look for low interest rates, appealing loan terms and reasonable administrative fees.
One of the biggest things to look out for when refinancing your home loan is the amount of time that it will take to break even. This is the point at which all of your administrative costs have been accounted for and your lower interest rate actually allows you to generate some respectable savings. You have to consider the amount of time that you intend to be in your home before selling. If your family expands or you need to change locations for a job or due to other lifestyle adjustments, breaking even in advance of selling will be essential for maximizing your returns.
FIXED OR ADJUSTABLE?
In addition to seeking lower interest rates or more manageable payments, a lot of people refinance in order to secure fixed rate mortgages rather than adjustable rates. Again, the type of funding products that you want to pursue will largely be determined by the amount of time that you intend to be in your home. If you intend to sell within the next five to ten years, staying with your current, adjustable rate might not be such a bad idea. By the time your monthly payments increase, you could be well on your way to moving. This negates the benefits of resetting your amortization clock and exhausting your equity. Moreover, you will have less time to break even and less opportunity to make a new loan worthwhile.
Be leery of funding products that don’t come with clearly outlined administrative fees. No matter how these fees are labelled, they will always exist. If they aren’t stated up front, they will usually be bundled right into the loan. Thus, have your mortgage broker assist you in breaking down each loan option according to the value that it supplies, the costs of securing it and the overall impact that it will have on your short and long-term financial goals.