Why Refinance?
Fundamentally, people refinance because they either want to save
money or spend money. This article discusses the most common
circumstances in which you might save money by refinancing.
One way to save money is to obtain a loan with a shorter life
compared to your current loan. For more information, read
Switching to a 15 year loan. If you are attempting to save
money by reducing your interest rate, read
Should I pay points or closing costs? and
Switching to a 15 year loan. If you are attempting to save
money by consolidating debt, read
Cash Out Refinance.
There may be conditions which require you save money in the
short-run. An Adjustable Rate Mortgage (ARM) with a low start-rate
can temporarily lower your mortgage payments. Depending on the
loan, you could substantially reduce your payments for a year or
more.
You might believe you'll save money in the long-run by switching
from an ARM to a fixed-rate loan--and you could be right. In this
case, you're assuming that rates will eventually increase enough
to justify the cost of refinancing. There is less certainty of
saving money in this scenario because the future is unknown and
rate comparisons are hypothetical.
Whatever your reason for refinancing, the process begins by
comparing the various loan options you have available, including
keeping your current loan. Real estate loans usually have income
tax effects. Before rushing into a new loan, consider having your
figures checked by your tax advisor. Talk to your current lender.
They may reduce some of their fees in an effort to keep your
business, or because they may have reduced paperwork.
For each loan you are considering, obtain an amortization schedule
and Good Faith Estimate (GFE). A complete amortization
schedule will identify the principal and interest portion of your
monthly payments over the life of the loan. With it, you can
accurately determine the interest paid within any time period.
The (GFE) will itemize costs associated with obtaining the loan.
The immediate costs of the transaction will be shown on the GFE,
while the interest expense over time will appear on the
amortization schedule. The information in these documents is
required to make an informed decision regarding the best loan for
you. |
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