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Refinance

Refinance can be as baffling as your first mortgage. The resolution to refinance your house is based on a number of factors. Some may be based on how long you plan to reside in your house; what would the difference be in the interest rates if you take a fresh loan; and whether you want cash refinance. Primarily, refinancing allows you to replace your existing loan with another but with different terms and conditions.

Advantages

Another benefit of refinance is the reduction in risk related to the current loan. Interest rates for adjustable-rate loans and mortgages fluctuate based on the movement of various factors. By refinancing an adjustable-rate mortgage into a fixed-rate one, the risk of interest rates increasing dramatically disappear, thus ensuring a steady interest rate over time. This flexibility comes at a price as lenders typically charge a risk premium for fixed rate loans.

You can take advantage of the lower interest rates to reduce your installments or, if you have enough equity in your property, then you can have an added advantage of discontinuing the payment of your mortgage. If you are keen on taking advantage of the lower interest rates, you would have to close your loan by paying the remaining dues. This holds true even if you have opted for a no cash/less cash conclusion on the loan.

If you are not sure if you are going to reside in the house for a longer period, then the lower installments of refinancing will not suffice to the closing cost. Therefore, you need to have some extra amount in your account when you make this decision.

When you opt for cash out refinancing, what you really do is mortgage more than what you owe currently and pay the difference between the two. For example: You have a debt of $90,000 on a mortgage of $160,000 and wish to reduce the current interest rates, as well wish get $20,000 cash (to renovate your current office space) or to clear off some previous debts. In this situation you can opt to refinance your current mortgage for $110,000. This way you can obtain the desired interest rate on the $90,000 that you still owe for the house, and still manage to get $20,000 cash to spend as you desire.

Cash-out refinancing is different from home equity loans in two ways. First, a home equity loan is a fresh loan in addition to your previous mortgage, while the cash out substitutes for the previous mortgage. Second, the interest rates on home loans are higher than that of the cash-out refinancing loan.

Risks

Most refinancing loans contain a clause called the "penalty clause" or “call provision” that becomes active if payments are made after the due dates. These loans provide, at best, a short-term solution and in some cases when borrowers default on loans, they are sold by the lender before the loan term finishes. So one needs to be careful and read all the clauses before signing the documents.

Secondly while some loans may have lower down payments and lower interest rates, the result may make you realize that the total costs over the loan’s life have been extended over the principal amount. Doing the math is important to calculate the up-front, the existing, as well as the future costs to get a clearer picture. This factor will assist you greatly during your decision to refinance.

According to research, it was found that some brokers have charged fees of more than 20 per cent of the existing equity in the borrower's homes. So herein lies the risk when one is applying for a loan. One needs to be careful so as not to fall into these traps.

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