Home Refinance – Tips to Borrow and Pitfalls to Avoid

Home Refinance – Tips to Borrow and Pitfalls to Avoid

Refinancing is the process of replacing your current mortgage with a new loan that has been sanctioned with a new terms and conditions. Generally, the new loan is offered against those properties which have already been used as collateral in your previous mortgage and may or may not exceed your current loan balance. The refinance process is commonly seen in home mortgages where people used the newly sanctioned loan as the previous loan clearance mortgage and the remaining loan funds are used at their best advantage. 

Reasons for Refinance:

Saving is Possible: Refinance helps to save your money and reduce your stress because your monthly payments will be reduced and saving is possible. Furthermore, if you get a low rate or when your loan term is extended you will have low stress but with an extended term you will be paying more in total loan.  

Time Length can be managed at Your Wish: Managing your time length is easy in refinancing. If you wish to shorten your loan period it is possible by reducing the term loan. Though doing this may cost you a little more in your monthly payments but in long term you will be saving much with a life of free debt.  

One Mortgage with Variety Usages: Refinancing is also a better mode of mortgage for variety loan clearance. If you have enough home equity loan than you can pay off high interest debts such as credit card balances or installment loans. You gain out of it as the interest on such debt is not deductible unlike mortgage interest.  

Merging Mortgages in One: This is also one of the positive points of refinance as it helps you to merge two mortgages into one single mortgage.

You can do this only if there is enough equity. In this case, the monthly payment on the new loan is likely to be lower than the combine payments on the first mortgage and the second one.  

Quit Private Mortgage Insurance: If you want to quit the private mortgage insurance than refinancing is a better solution because if your loan balance is below 80% of the new appraised home value, you can go for a home refinance and stop paying the Private mortgage insurance.

Tips for Refinancing Your Home:

Appropriate Lender: Lender always plays an important role in refinancing your home and guiding you to your destination. A better refinancing company can make your refinancing program easy and hassle free. Cost cut and negotiating in interest is possible and easy with a good lending institution.  

Prepayment Penalties: If you are heading for refinancing than I suggest you to make some homework on previous mortgage because many borrowers will get into their mortgage with the mortgage having a prepayment penalty and they will not even know about it. So its better if made sure that your original mortgage does not have a prepayment penalty or early payoff penalty of any kind. Generally, prepenalty ranges from 6 months to 3 years with a penalty for an early payoff. The penalty is usually about the amount of 6 months worth of your mortgage loan interest, but this varies. You would have to be able to have some significant payment and interest savings on your refinance loan to justify refinancing a mortgage loan with a prepayment penalty.  

Refinancing Details: Refinancing details are very important and I highly recommend everyone to read this before making any decision because all the cost that you will bear through your loan period and other hidden costs like: service charge is mentioned in the details. It has also been noticed that many lenders hides the some penalties from you like: prepayment penalties in fear to loose the buyers which will definitely harm you in future. And by making notes of all these financial terms you can even calculate the interests and loan amount which will help you to understand your loan better.  

Closing Cost and Interest Cost: Your mortgage closing cost and interest cost is very essential to be known because these are the two biggest factors that will help you figure out which lender is right for you. If one of these two factors is too high, it could offset the benefit of refinancing for you.

Some Pitfalls to be aware of:

Low Credit Score: An individual is considered as an unreasonable borrower if his credit scores are poor. Generally, low credit score is ranged 600 or below. Thus, some borrowers may encounter problem while borrowing but this can be improved if the borrower pays all the bills on time and paying down all the balances of their credit cards. But, sometimes even the lender seems eager to lend even if he find the low credit report because lender may get attract to your collateral. Thus, its better to fix your credit score rather than going with bad scores.  

Yield Spread Premium or (YSP): Yield spread premium is an important factor that every borrower should know about. Many borrowers are unaware of this premium and this creates a compulsion to the borrowers to overpay. Furthermore, many mortgage companies and the brokers inflate the interest rates because the wholesale lender behind the loan pays them a bonus of overcharging you. Once you understand this you will be able to negotiate while refinancing and to avoid overpaying.  

Arbitration Agreements: Arbitration agreement is the most important thing that I really want everyone to be aware of and this is because many avaricious lenders plot their borrowers by signing them in these arbitration agreements. But, I strongly suggest my readers to keep themselves away from this. Arbitration agreements is a financial loop hole where the agreement means you are forfeiting many of the rights and other protection that you will receive under the law. Agreeing to arbitration means that you agree to a third party arbitrator resolving any legal disputes you have with the lender. Never agree to arbitration with any mortgage lender.

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