For many people there comes a time when it makes sense to refinance their home mortgage. There can be any number of reasons to do this but for most people the primary goal is to lower their interest rate and their monthly payment. Everybody's situation is different so the reasons for doing a refinance can vary from person to person. |
When you do a home mortgage loan refinance you are basically taking out a new loan and using it to pay off an existing loan. You of course do not want to refinance if your new loan will cost your more in interest and monthly payments so it pays to research any new loan carefully.
As you delve further into the realm of refinancing a home you will undoubtedly run into terms that you may not be familiar with. These may include the following:
Term Length – This is the amount of time you have to pay back the loan. The majority of loans go for either 15 or 30 years. The longer the term the more interest you will pay during that term.
Fixed Rate Mortgage Loan – This is a mortgage in which the rate is set at closing and does not change for the life of the loan.
Adjustable Rate Mortgage (ARM) – This is a mortgage with an adjustable rate. That means the rate can move up or down depending on what the prime rate or treasury index it is tied to is doing. This type of loan usually starts out at a low rate that makes it a great deal, but consumers need to be careful if and when the interest rate goes up, increasing the monthly payment.
Annual Percentage Rate (APR) – This number represents all the costs associated with a mortgage shown as an interest rate. It can vary among different lenders because they all calculate it a little differently. If you are comparing rate use the Good Faith Estimate that all lenders are required to provide.
Good Faith Estimate (GFE) – This is a document that all mortgage lenders are required by law to provide to all applicants. It will give a full account of all the estimated costs for a loan from a particular lender. You should have this in hand no longer then 3 days after filling out a loan application.
Loan to Value Ratio (LTV) – This ratio is a percentage that shows what percent you are borrowing against the appraised value of your home. Keeping this ratio below 80% is what most lenders are looking for. If your LTV is higher then 80% you will probably be required to purchase mortgage insurance in order to refinance.
Points (Discount & Origination) – There are two types of points that you can pay. Discount points are paid up front at the closing and are used to bring down the interest rate. Normally one point will equal one percent of what your total loan amount is. Origination points, or fees, are paid for the services rendered by the loan representative.
Refinancing a home mortgage loan can be a good way of freeing up money for other uses but it pays to pay close attention through out the process because you don't want some hidden cost or fee to make your new loan cost more than the original mortgage.
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