|Refinancing, Home Equity Loans and other
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Refinancing your Mortgage
Refinancing of mortgages has always been a substantial business as clients go after more competitive interest rates. However, more recently, refinancing has received a boost through the provision of equity lines, that provide funding for almost the total market value of your home. There are a number of reasons why you would want to consider refinancing. Some of the main ones are:
Many financial advisers caution against cash-out refinancing to pay down unsecured debt (such as credit cards) or short-term secured debt (such as car loans). You have want to talk with a trusted financial adviser, who knows your personal financial situation, before you choose cash-out refinancing as a debt-consolidation plan.
This is just a very short summary of reasons for refinancing. Though, if you intend to go ahead, it is essential to make a detailed list of why you refinance and what the financial effect of each individual reason is for you. Remember, there are also tax implication which you have to consider!
You may want to talk to an accountant about your tax situation and what effect refinancing might have on that! Though, if you use common sense, and have some arithmentic ability, you should be able to determine that yourself.
When you should not consider to Refinance
The table below gives you an indication as to how many years you have to be into the mortgage when any interest rate savings is no longer a deciding factor.
of a $200,000 loan for 30 years at 5.9%
Source: 2008 Federal Reserve
The Costs of Refinancing
The dollar cost of refinancing can be considerable. In most cases the same costs as those you originally paid, when you took out your first mortgage, have to be paid again. You can find those closing costs here. As a general rule, you have to be in the house for a further ten to 15 years, before you make up for these costs.
Beware of financial institutions offering "no costs closings" on refinancing. Often they just hide the closing costs into a marginally higher interest rate. Therefore look closely at the contractual obligations you sign.
There are numerous refinancing calculators available which show you what the interest rate on the new refinancing loan will have to be to make a refinancing viable. The very best of these REFINANCING CALCULATORS is provided here.
Home Equity Lines of Credit
A home equity line of credit is a form of revolving credit in which your property is the collateral. Usually, home owners use this line of credit for major expenditure, such as home improvements, educational or health related expenses.
The maximum credit line is often calculated on the basis shown below. In addition, other factors such as your ability to repay determined by your income,
other debts and your credit score, will be factors for the maximum amount that your lender will commit to you.
A revolving credit home equity line is operated like any other bank account and will normally have special checks. Minimum monthly repayments on home equity lines are sometimes required as a percentage of the amount you have borrowed at the time (usually about 2.0-4.0 percent of the borrowed amount).
You should also be aware that some lenders will require you
Most lenders will not make any other restrictions on the loan and you can draw on your credit line up to the preset limit. Although, it has recently been known, that lenders will decrease the maximum amount of the credit line, if your credit score suddenly deteriorates!
The Interest Rate for a Home Equity Line
The interest rate (APR) is usually variable, reflecting market rates. The rate must be based on a publicly available index, such as the prime rate, U.S, Treasury Bill, LIBOR or similar. Like with mortgages the home equity credit agreement will state the rate of interest as the interest index used "plus X percentage points margin". You can find out more about the index rate here.
Lenders sometimes use low introductory rates (teaser rates) that are valid for 6 months. Read the home equity loan agreement carefully, so that you exactly know what the conditions of the loan are. Be also aware, that there maybe closing costs, for such items as an appraisal, documentation and maybe other items. Make sure that you know exactly what these closing costs are, before you sign an agreement.
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