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Mortgage Basics |
One of the best ways you can save money when refinancing a home is to understand the
mortgage basics. For existing homeowners, the actual term "mortgage refinance" means to
take an existing home loan and create a new loan based on the balance. The reason people
refinance a mortgage is to secure a lower interest rate or to shorten the length of the loan.
Homes financed during the 1980s hit a high of 16%! Today, interest rates have ranged from
5% to 8% on average. By refinancing a loan in this scenario, you would literally be cutting the
amount of interest paid by more than half! The savings would be significant per month and on
the overall amount paid for the home.
To determine if refinancing is a good option for you, work with a lender on the 2% rule, which
means if your current interest rate could be reduced by 2% or more, then you should definitely
consider refinancing. Additionally, you can locate several good worksheets on the Internet that
would allow you to make these calculations on your own. You also want to consider closing
costs, which will be a part of the refinanced loan. These fees include an appraisal of the
property, title insurance, credit checks, inspections, attorney fees, and other applicable
charges. Too often, when people refinance their home, they forget about the money needed
to close the loan.
Another consideration for refinancing is to understand that this does require some invested
time. Try to think back to when you first purchased your home and all the paperwork required.
Refinancing is a new loan that has the same requirements. You also want to shop around for
the best loan. Because this is a refinance, the loan amount will vary and on average, you will
find 80% of the homes current market value. If you plan to take out some of the equity during
the refinance to pay off bills, more than likely the loan amount will be less than the 80%.
Depending on where you live, you may be required to pay some type of tax. A few that are
often associated with a refinanced loan are "Realty Transfer Tax," "Mortgage Recording
Fees," and "Mortgage Taxes." Before you get too far into the process, determine what taxes
will have to be paid and how much. The same would apply for points, also called "Origination
Points" or "Discounts." Each point is equal to 1% of the amount you would borrow. Paying
points is not always required so again, work closely with a qualified lender to determine if you
had to pay points and if so, how much.
Another important consideration is the type of mortgage. With a tight economy, most
homeowners look for ways to lower their monthly mortgage payment. One way to lower your
monthly payments and overall cost of the home would be to change the type of mortgage. For
example, if you have a balloon type loan where the monthly payment increases each month
staying within a specific interest range, and changed it to an FRM, which is a fixed rate
mortgage, payments would level off. Just because you did not qualify for a type of loan when
you first purchased your home does not mean you will not qualify for it now. Understand the
basics, which will help you determine the best ways for saving money and possibly paying off
your home early.
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