Thursday, 13 December 2012

Do's and Don'ts of refinancing

There is never a better time for refinancing than now. Mortgage rates are at historic lows.  This can save thousands of dollars in interest and help build up equity on one's home faster. However, refinancing can also be expensive and cost more than the savings. Here are some tips to help navigate the field of refinancing.

Cost calculations and credit history
DO the numbers. With a good credit history, you might easily get a mortgage refinance. However, what you see is not what you get.
Calculate the new interest rate you are considering, and plug in the closing costs. Request for a detailed list of all fees and expenses; look out for hidden expenses, padding of fees for services offered by third parties, and any prepayment fees your current lender might charge. These can be expensive (1 to 3 percent of the mortgage balance) and nullify any benefits gained from refinancing.
Talk to your current lender
DO talk to your current lender first. Some lenders -- who do not want to lose your business as well as your loan may be willing to modify your existing loan so that you will get a lower rate at no cost or at reduced settlement costs. Also determine if you will have to pay a prepayment penalty for paying off your current loan early.
Consider the same payment over a shorter mortgage
DO consider changing to a 15-year mortgage instead of just refinancing to get the monthly payment down. Depending on your situation, you may be able to do it with little or no increase in your monthly payment. But the debt will be cleared much sooner, so the overall interest payments will be much lower. And in case you sell your house in the interim, you'll have built up much more equity.
Move from Floating to Fixed Rates
DO inquire about "lock-ins" and "float downs". One of the huge benefits refinancing offers is upgrading from potentially risky floating interest rates to a safer fixed interest rate. Fixed interest rates allow for better budgeting as you will be sure of the monthly mortgage payments.
If you are in doubt as to the validity of a potential lender, contact your local Better Business Bureau, your State (or local) Banking Commissioner or even the AARP for further information.
Investment properties traditionally come at higher interest rates. The best rates available are for single-family homes that are mostly lived in. For condos, lenders worry that buying just part of a building is more risky than buying a single family home. There are too many other risk factors one cannot control, and they have higher default rates.
In conclusion, when refinancing one's current mortgage, it is effectively a brand new settlement. The only difference is that there is no buyer or seller present at closing, and there will be no real estate broker involved.The tax consequences of refinancing can be difficult to grasp. But instead of grappling with the hassle alone, contact your tax advisor who understands the tax ins and outs of refinancing and can help you through the process. 

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