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Steps to Refinance a Home

More and more, homeowners are looking at options to refinance a home. With interest rates low and the economy tight, instead of moving, homeowners are deciding to stay put and secure a better loan. While the option to refinance a home makes sense for many people, it is not the solution for some people in certain situations. However, to secure low rates and lower monthly payments, this is a great opportunity.

Typically, experts in the mortgage and financial lending industry tell homeowners that if they can lock into a lower interest rate by a minimum of 2%, then this might prove to be an excellent decision. Even so, people need to understand the length of time it would take for the savings to refinance a home would be recouped.

As an example, if a homeowner had a home financed initially for $100,000 using a 30-year mortgage and the interest rate locked into was 8%, chances are the monthly house payment is around $750. However, if that person could lock into a lower interest rate of 6%, the amount saved each month on payment would be approximately $135. Then if the homeowner had to pay $1,000 in closing costs, which is required to refinance a home, then in about four months, that person would break even. This would mean the decision to refinance the home would be a good one.

Another thing that homeowners need to consider in addition to annual percentage rate or APR is that a number of other factors come into play. For instance, the person would need to think about the terms to refinance the home, along with variables of the interest rate. In this case, the homeowner would choose from fixed rates or variable rates. Typically, the Adjustable Rate Mortgage or ARM is a great option at first but if interest rates increase, the monthly payment would increase. For this reason, most people that want to refinance a home will go with a Fixed Rate Mortgage or FRM, which means the interest rate remains the same throughout the life of the loan.

Another important consideration when deciding to refinance a home has to do with points. Unfortunately, some homeowners misunderstand closings associated with a refinance loan but the truth is that closing costs are required, meaning the homeowner has to again pay origination or discount fees just as they did when they originally purchased the home. In this case, it would be important for the person to determine if a lower interest rate to refinance the home is low enough to justify the cost of the points. Sometimes it would be but in some cases, it would not be.

Because there are so many lenders wanting business, some people are lured in by other lenders than the original lending company. Experts recommend that anyone wanting to refinance a home should first talk to the original lien holder. The reason is that the first lender would already have the majority of paperwork on file, which would save the homeowner a tremendous amount of time and effort in pulling everything together. Typically, when the original lender is used to refinance a home, the process is quicker and easier. Of course, it never hurts for the homeowner to look around, making sure he or she is getting the best rates possible.

People need to remember that when they refinance a home, the closing costs involve a number of things such as:

  • Application Fees This fee is what the lender charges for processing the loan and running a credit report
  • Title Search - This charge allows public records to be examined for the purpose of confirming ownership
  • Title Insurance With this fee, the cost of a policy issued is covered by the title insurance company for any loss from discrepancies in the title of the property
  • Attorney’s Fees Usually, the lender would charge an attorney fee for conducting the close of the loan but this could also be done by title insurance companies, escrow companies, lending institutions, and real estate brokers
  • Loan Origination Fee and Discount Points This is another fee paid to refinance a home, covering the lender’s work for evaluating and preparing the homeowner’s loan
  • Appraisal Fee The appraisal fee confirms the current value of the property
  • Miscellaneous Fees Prepayment Penalty, Private Mortgage Insurance, VA Loan Guarantee, FHA Mortgage Insurance, etc might also be involved

The type of loan used to refinance a home is based on a number of factors, such as the number of years that the homeowner expects to live in the home, what this person’s other financial obligations are, and the current interest rate. However, the money saved with a home refinance loan could be used for many things to include home improvement, a new car, putting a child through college, or perhaps a much-needed vacation.

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