This tutorial will answer the following questions:
- What is Refinancing?
- Why should you consider refinancing?
- What are the dangers of refinancing?
- How do you select the best Mortgage Broker?
- What are the different types of mortgage loans?
What is Mortgage Refinance?
Mortgage refinance is a term used to refer to the replacement of a current debt obligation with another debt obligation, but under different terms.
Why Should You Consider Refinancing?
There are several reasons why you should consider refinancing.
Save thousands of dollars
By refinancing to a more favorable deal, you are likely to pay less on your mortgage. Whether you manage to secure a home mortgage with fewer fees, more features for quicker repayment, or lower interest rate, saving money in the long term is very possible.
Lower the monthly payments
Is paying your monthly mortgage payments a struggle? Besides going for a lower interest rate, there are other several other alternatives. One option is refinancing the remaining principal amount at the original duration of the loan. For instance, say you borrowed $250,000 on a 25 year term, and after 10 years are left with only $150,000 on the mortgage. If the monthly repayments are a burden, refinancing the $150,000 back on a term loan of 25 years will reduce them significantly. If this reduces the burden of settling your bill month, it may be a very viable option.
Is managing your debt a struggle? Are you paying too much interest? One of the simplest ways to deal with high interest and credit card debt is through mortgage refinance. All you need to do is refinance your total debt, including all high interest loans and credit card debt, and pay only the low interest rate charged on your home mortgage. For example, if you owe $120,000 on your home mortgage, and an additional $30,000 in other debt, you should then refinance for $150,000. This means you can pay the $30,000 that had a high interest rate at the lower rate on your home mortgage. This will take the pressure off you, as well as save much money on interest which you now don’t have to pay.
Pay off mortgage sooner
Do you want to own a home fast? Or have you had a salary rise and want to invest your money effectively? You could consider refinancing to an All-in-One or a 100% offset home loan. These kinds of loans can significantly reduce the level of interest on your mortgage. In addition, opting to pay more every month can greatly shorten the time it takes to own a home.
Do you want to minimize your monthly payments and have the choice to borrow more when necessary? Then you should consider a Line of Credit loan refinancing. This is an interest only loan that enables you to take advantage of your equity, while at the same time giving you flexibility with your finances.
Dangers of Mortgage Refinancing
The main danger is as a result of lack of awareness. If you don’t know what you want from refinancing, then you are vulnerable to being exploited by unscrupulous mortgage brokers. However, this does not mean that you should not use mortgage brokers. You just need to be aware of the advantages and disadvantages of the deal being recommended to you. Mortgage refinancing is not for the ignorant. You need to select your broker wisely.
To find the most favorable mortgage refinancing deal, you will need to weight the pros and cons of many different loans and lenders. However, doing this yourself could be very time consuming and overwhelming. This is where mortgage brokers come in. Again, the key is awareness. Be aware of the advantages and disadvantages of any recommended deal. You should also be informed of how crooked mortgage brokers operate.
How to Select The Best Mortgage Broker
Honesty is a vital element to look for when dealing with mortgage brokers. However, not all mortgage brokers are honest. The following are factors that will help you select the best mortgage broker and land a great refinance deal.
Unbiased lender choice
Mortgage brokers earn a commission from the lender you borrow from. They need to be honest with you concerning the amount of commission they are earning from the lender. Good mortgage brokers won’t mind giving these details.
Giving you the actual cost of the mortgage
When looking at any home loan products, ensure the broker gives you the annual percentage rate (APR). APR reveals the real cost of the loan by considering all foreseeable charges and fees associated with the loan. This will make it easy for you to compare home loan products.
Providing all the information
You need to have information on the whole deal. What is the full service offered by the broker? Is there ongoing assistance and service after you secure the loan? If there is, ask for how long. What fees are involved? A good mortgage broker will disclose all this information before the papers are signed.
Ensuring client understanding
You need to have an understanding of the pros and the cons. A good mortgage broker will explain everything to you clearly so that you can understand. This will help you think through it and decide if refinancing actually works for you.
Professional indemnity insurance is a must for brokers. This shields professionals from liability claims arising from negligent work. Lenders usually have it. However, brokers should not presume that the umbrella organization’s insurance covers them. The broker needs to be certain as to whether they are protected or not.
Is the mortgage brokers qualified to give lending advice? Most countries have reputable bodies that regulate the mortgage industry and that provide brokers with certificates of credentials or memberships. Make sure your broker has the proper credentials and memberships and is qualified to refinance mortgages.
Common Types Of Mortgage Loans
It is vital to know your options. There are numerous home loan products out there, all with varying features, fees and interest rates. The following are the most common types of home refinance loans.
Adjustable Rate Mortgage (ARM)
Adjustable rate mortgage, as the name implies, this loan’s interest rate fluctuates through the loan’s life cycle. Initially, the loan’s interest rate is fixed over a set amount of years, after which it adjusts depending on its economic index. The loan’s initial fixed interest is usually lower than that of the fixed rate mortgage.
Fixed Rate Mortgage (FRM)
Fixed rate mortgage - FRM loan has interest rate that is fixed for a particular period of time. This enables you to budget effectively and relieves you from stress knowing the monthly payments won’t change. The disadvantage of this loan is that it has less features, thus less flexibility. Most FRM’s don’t allow extra payments and additional funds are redrawn.
Balloon (Jumbo) Home Loan
Balloon or Jumbo Mortgage is a home loan which has a fixed interest rate over a certain period of years. This period is normally short, about 7 to 10 years. The advantage of this loan is that its interest rate is as low as that for ARM loans. The downside is that when the term is over, the loan is to be repaid in full. This calls for caution when dealing with this kind of loan.
Home Equity Loan
Home equity loan is a fixed rate loan that allows one to tap into their equity, and provides the finances to renovate, invest in managed funds, shares etc. The annual percentage rate (APR) remains constant for the full life of the loan, which means monthly payments never vary. However, caution is called fro with these loans since it leads to a reduction of your home’s equity.
Home Equity Line of Credit
Home equity line of credit allows one to draw on their mortgage balance up until the original amount borrowed. This enables you to tap into your home’s equity. Furthermore, monthly repayments are normally interest only. This means you can borrow at lower interest rates than personal loans or credit cards, and pay back when you wish. Precautions should be taken with this kind of loan since it can also reduce your home’s equity.