HOW REFINANCE WORKS
Refinance is commonly used all over the country mostly for homes and secondly for auto loans.When we refinance,we apply for another loan to clear out the first loan.This reminds me of my friends who play small stakes card games,they are always in need of money as card games can be an expensive habit.When Dick needs 2 grand,he comes to me.I’m a little skeptical,but i check Dicks’ paying back capacity,i check how well he honors his word,how good his track record is.
After that i lend him the 2 grand and he agrees to pay me back in 1 years time with interest of 3% spread over the 1 year,so each month he pays me a small portion of the 2 grand.So in total he now owes me 2000 + 3%= $2060.6 months down the line, hes having difficulty paying me back monthly portions.He still owes me half the amount $1030.He approaches his rich friend Barnie for a loan.Barnie has alot of money in his pocket just sitting there.Its not earning him anything,its just lying idle in his pocket
Difference between Barnie and me is that Barnie agrees to charge Dick 2.5% interest instead of 3% over a period of 1 year.Dick takes a loan of $1030 from Barnie and clears me off totally with interest. Im happy.Dick now has an easy loan that he can pay at lower interest and an extra 6 months to clear it off too.Dick is happy.Barnie now is earning interest on his money that was lying idle in his pocket.Barnies’ happy.
Most people take home loans early out in life to buy a home that lasts for over 30 years.Somewhere down the line,they take another loan to clear out the first loan,at a lower interest rate.This decreases their monthly payments towards the loan.IT will take a good 3 years after your refinance starts to realize and “feel” the benefits of refinance,just as a large corporation pumps in alot of money to start a new venture and only breaks even after 10 years.
Advantages of refinancing your home loan include:
1.Lower rate of interest.Almost 1.5-2% decrease in the interest rates.adjusted that over a 10 year period translates to huge savings
2.Refinance allows you to increase the tenure of your loan,however i nthis case you will end up paying more interest as interest and tenure are inversely proportional.
3.Change in interest from floating or variable(ARM) to fixed rate.This is essentially useful for people who want a constant monthly installment instead of one that keep changing.
Costs associated with refinancing
When you foreclose your current home loan and apply for a new loan against your house from a new lender,there will be charges at both ends- closing and clearing out your previous loan and starting a new one.There will be closing fees and any foreclosure or prepayment fees.The new home loan would require application fees,title insurance,mortgage charges and appraisal fees.The total of all these fees would generally add upto about 5% of your outstanding amount left on your old loan.Which means,for example,if you had 10,000 left on your loan before you went for refinance,the costs you would have to bear to refinance would amount to about $500 approximately give or take.
Current Refinance rates
Home refinance rates currently by most lenders is about 2.99% for a 15 year period.If you increase the duration,the interest rate will will increase,but your monthly payout will decrease,but on the whole at the end of the loan period you would have paid a more substantial amount than the principal amount this way.
Similar to home refinance,your auto loan can also be refinanced in the same way.A new auto loan would cost you about 2.99%.If you chose to refinance it,rates are 3.69% for 2-4 years and 4.19% for 4 to 6 years.
Cash out refinance
This is a type of refinance option wherein you borrow a refinance amount more than the outstanding balance and receive that potion in cash.IF for example you have $10,000 left on your loan when you want to go in for refinance,you apply for a cash out refinance wherein the new lender gives you $15,000 instead of $10,000.that extra $5000 you will receive upfront in cash,and the rest $10,000 will refinance your previous loan.
home buying tips for first time buyers
Set your budget
Most young couples that set out house hunting are in the prime of their lives.If this is your first house you would be too.Real Estate agents often show customers some of the best homes they have, and first time buyers are often enamored by the idea of owning a beautiful big house.They think they can take a larger mortgage and by some means pull through.This of course is the worst idea ever.It maybe disappointing not buying your dream house because it costs $50,000 more,but in the long run you will be thankful.Setting a modest and realistic budget is of prime importance before you set out on your home adventure.In the event of job loss,medical expenses or unforeseen events,paying back that mortgage should be hassle-free.
Most home shoppers only worry about the costs that come up before buying a house,but forget about costs that will be incurred after the purchase has been completed.These include annual insurance,property taxes and maintenance costs.These are in addition to you monthly payments towards your mortgage,which by itself is a huge cut out of your pocket as it is.So taking a grand total including mortgage payments as well as taxes,insurance and maintenance should give you a better picture of what you will be going in for.Owning a house is no laughing matter.
Dont marry your mortgage
This is probably the most important financial decision you will have to make while buying your house.Take sometime before deciding whom you want to get your mortgage from.Just as you went house hunting and then finally closed in on one particular house,the same way, take quotes from different lenders including a full list of fees and other costs that you will be liable to pay.
Look out for two important aspects of low closing costs and lower interest rates.Remember a 30 year mortgage is almost a lifetime,let it not make your life uncomfortable.The monthly payments towards the mortgage should be very easy on your finances and should ideally be easy enough even for a single income in the family to handle.As far as interest rates are concerned,its a simple calculation, he lower the interest rate, the faster your principal balance will be reduced.Keep your mortgage tenure as short as possible, dont let it plague you for a lifetime,because if things get tough, you cannot simply divorce it.