Mortgage Refinancing FAQ's

What exactly is mortgage refinancing?

Mortgage refinancing is when you take out a new mortgage on your house to pay off your current one, usually at a different rate and payment. Most often, people choose to refinance their mortgage to get a lower interest rate, lower monthly payments, or to access home equity for home improvements, debt consolidation or extra cash. Reducing rates, payments or getting extra cash helps homeowners to use their biggest asset to their advantage. Many people find refinancing their mortgage is the fastest and best way to access cash for home improvements, college tuition, or to pay off high interest credit card debts.

When should I refinance?

That's an answer that will differ for each individual depending on why they wan to refinance. For those looking to lower their interest rate or payment, refinancing is generally considered a good idea if the current market interest rate is at least 1 to 2 percentage points lower than your current APR. However, if you are considering refinancing because you need to pull cash from the equity you've built in your home for home improvement, college tuition, debt consolidation, etc... then refinancing can make sense at any time. If rates are considerably higher today than the rate you currently have, it may be better to consider a home equity loan or line of credit to access cash from your home's equity.

How do I calculate my savings by refinancing?

Try our online calculator to determine exactly how much you can save by refinancing your mortgage.

What types of mortgage loans are available for refinancing?

Generally, the same mortgage types that were available on your initial home purchase are available for refinancing your mortgage. Fixed rate mortgages (FRMs), and adjustable rate mortgages (ARMs) are the two most common types. Although, there are many "hybrid" mortgage options that carry fixed rates for a designated period of time then change to an adjustable rate. These "hybrid" mortgage options can have much more attractive rates than a conventional fixed rate, fixed term loan. It's definitely worth exploring all of your options.

Should I refinance with a fixed rate mortgage or an adjustable rate mortgage?

That's a difficult decision to answer because it really depends on individual needs. Generally, what makes fixed rate mortgage a good choice is that they provide the security and consistency of terms that you know upfront and will never change throughout the life of the loan. With an adjustable rate mortgage your take a bit of risk that interest rates will remain at an affordable level for your budget. The risk is in the fact that as your rate increases, so does your monthly payment. If you aren't sure which option is best for you, talk to a mortgage or financial consultant before making your decision.

What fixed rate mortgage terms are available for refinancing?

Fixed rate mortgages usually come in 15 year, 30 year, and 40 year terms. The shorter the span of the mortgage in years, the lower the interest rates typically will be. The most common term for a fixed rate mortgage is 30 years, but 15 year mortgage loans are very common when refinancing.

How do ARMs (adjustable rate mortgages) work?

With an adjustable rate mortgage, the interest rate changes periodically throughout the loan. Typically, the interest rate on the loan is tied to one of several financial indexes. At specified intervals, the rate will be reset based on the current index rate. That means when the loan rate adjusts, your monthly payments will change based on the current index rate. Make sure to read all the specific details of the ARM and calculate some sample increases to make sure you can afford the changes before signing any documents. Some ARMs put ceilings on the payment increases or interest rate either for each adjustment period, the life of the loan, or both. This type of loan has received some bad press because people were using it to bite off more than they could handle. There is nothing inherently bad with this type of loan. But, like any financial decision, you need to carefully weigh your options, your current and future financial situation and make educated decision based on what is right for YOU.

Home Equity Loan and Home Equity Line of Credit FAQ's:

What exactly is a home equity loan?

A home equity loan or home equity line of credit is a way to turn the equity in your home into cash. By using your home for collateral, you can borrow against the equity to access cash for home improvements, college, debt consolidation or cash for just about anything you can think of. Home equity loans are commonly known as second mortgage, because instead of refinancing and paying off the existing mortgage, they take a "second" position on the deed as a second mortgagor.

What are the types of home equity loans?

There are generally two types of home equity loans; closed-end and open-end. Closed end home equity products are generally referred to as "home equity loans." In a closed-end home equity loan, the borrower receives a pre-determined amount of money at closing. Throughout the loan, he or she cannot borrow any more money on that loan without refinancing or taking out a new loan. Open-end home equity products are typically called "home equity lines of credit." A home equity line of credit works very much like a credit card. The lender sets a loan limit and the borrow is allowed to draw on that available credit line up to the limit during the draw period.

Debt Consolidation FAQ's:

What is debt consolidation and is it right for me?

Debt consolidation is the process of taking out one loan to pay off a lot of other loans that usually have higher interest rates. Thus, consolidating or bringing together all of those smaller bills in one bigger loan. Home equity loans and mortgage refinance loans are the two most common ways to consolidate debt and reduce interest rates.

Can debt consolidation reduce the amount of my debt?

In recent years, it has become common for debt settlement and credit counseling agencies to refer to their services as debt consolidation. That's not really what they do. Legitimate credit counseling agencies consolidate payments and negotiate lower interest rates with your creditors. Most credit counseling agencies today provide valuable services to those struggling with excess credit card debt. On the darker side, another type of organization advertising their services as "debt consolidation" is the debt settlement firm. While there are certain times when debt settlement is a viable option for consumers who have multiple accounts in collection status, it's not a service that is recommended for people with decent credit. They advertise that they can reduce your overall amount of debt needing to be repaid, but they do this by allowing all of your bills to go into collection status with third party collection agencies, then negotiate with those collection agencies to take less than the full balance on your debt obligation. If you have oodles of collection accounts, debt settlement is something you should consider. If you have decent credit and a steady income stream, you should consider debt consolidation using the equity in your home or you should consider the services of a legitimate credit counseling agency.

What kind of collateral will I need to consolidate my debts?

That really depends on the size of the loan you need, your income, and you asset base. As a general rule, lenders will lend more money when they have sufficient collateral to back the loan. For homeowners, equity in you home is usually the best solution because it also carries generous income tax benefits (consult a tax professional for details.)

Is debt consolidation right for me?

If you have a lot of high interest debt such as credit cards, personal or auto loans, then debt consolidation may be right for you. Consolidating through a refinance or home equity loan is a great way to pay of your high interest debt to reduce the payments and interest.

Will debt consolidation rebuild my credit?

Assuming you have no delinquencies and do not incur any additional debt after the consolidation, your credit will definitely improve.

Will debt consolidation solve all my financial problems?

That is a very personal and individual question. So much depends on your situation and how you deal with things going forward. For some people, debt consolidation is an excellent option; for others, it may not be the correct choice. So how do you decide? Talk to your accountant or a financial or credit counselor to review your options.

Home Mortgage to purchase a home FAQ's:

What is a home mortgage loan?

A mortgage is loan that is obtained to purchase real estate. The word mortgage means a lien or legal claim on the home or property which is the collateral for the debt.

What types of home mortgages are available to purchase a home?

Just like mortgage refinance loans, home mortgages typically fall into two categories: fixed rate mortgages (FRMs), and adjustable rate mortgages (ARMs). Both types have their benefits based on your individual needs. Consult a mortgage counselor or other financial professional to help determine which loan type is right for you.

What are the typical term lengths for home mortgages?

The typical terms for home mortgages are 15, 20, 30, and 40 years. In some high priced areas of the country, 50 year mortgage loans are now coming on the scene. Remember that the shorter the term of the mortgage, the lower the interest rates. Necessarily, this also means a larger monthly payment. The most common mortgage term for a purchase home mortgage is 30 years.

What does LTV, or Loan-to-Value mean?

LTV stand for loan to value ratio. It is simply the ratio of the amount of money borrowed to the market value of the home. For example, let's assume you want to borrow $180,000 and your home value is $200,000. The loan to value ratio (LTV) would be $180,000/$200,000 or 90%. The lender will set the LTV based on program terms and individual borrower qualifications. Generally, the better your credit rating, the higher LTV a lender will allow you. With higher LTV loans a lender will usually require a mortgage insurance premium.

What is mortgage insurance premium or private mortgage insurance?

Often referred to as MIP or PMI, this type of insurance is to protect the lender in the event of borrower default. Basically, if your loan amount exceeds the parameters set by the lender for LTV, you are usually required to pay PMI or MIP. It can be a surcharge added to your monthly payment or it can be added to the amount financed on your loan. Ether way, it increases your monthly payment. There are several ways for lenders to help you avoid paying MIP or PMI. Having a higher down payment when buying a home will reduce the requirement for PMI or MIP, but many lenders also have special PMI or MIP buster programs to help eliminate this. Ask your lender for details.

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