Sensible advice for homeowners

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Many borrowers are forced to take out their first mortgage loan with a higher interest rate charge than they would like.  This higher rate is often demanded because an applicant has only a short credit history, can only offer a small deposit, or has a high debt-to-income ratio – an element that is as important to a lender as the credit score. Once the mortgage repayments have been made punctually and with no missed payments for a few years, the homeowner’s credit rating may well have improved. Old debts will have been settled fully and the increased equity in the house, due to house price increases overall, are indicators that it may be a good time to negotiate a more favorable interest rate for your mortgage.

Refinancing your mortgage has several positive attractions. First, by refinancing you should be able to reduce your current rates, saving significantly on your monthly payments and the total cost of the loan. In general, obtaining an interest rate two to three points lower than your current rate is enough to recoup the cost of the refinancing and is a very worthwhile and sensible step for homeowners to take. Another reason that homeowners refinance is to gain access to some cash against the equity they have built up in their home. A home equity cash-out refinance is often far cheaper than taking out a traditional loan for large expenses such as college tuition or to purchase a new vehicle.

Before going ahead with refinancing it is important to fully understand the costs and fees that will be incurred. While lower monthly payments may look appealing on paper, it is important to consider how long it will take to recoup the amount of the fees connected with the refinancing. Shopping around can save a considerable amount on such fees. Some banks have “sales” on refinances, including low-cost or “free” refinancing offers. To ensure that a fee that pops up later in the process does not take you by surprise, be sure to read all the fine print carefully before you sign.

It is also a good idea to have a repayment plan in place before taking out a new mortgage. Reducing the monthly payments may ease some of the immediate financial burden, but by refinancing, you may be extending the life of your loan. Be sure that you are able to make the payments for the entire life of the loan. Since many mortgages cover a span of 30 years, planning for children’s college expenses and your own retirement may be factors that could affect your ability to repay the loan. Long-term thinking is necessary to ensure that you will be able to make all the payments to the maturity of the loan.  It is worth considering taking out some form of payment protection insurance if you can afford to do so.  Take care though as this form of insurance does have pitfalls and you need to establish exactly what eventualities you are covered for.

With a cash-out refinance, it is important to consider the value of the investment. Will the cash be used to pay for a college education, renovations on the home, or a large purchase such as a vehicle or an expensive holiday? Home renovations may increase the value of the home, making them a sound investment. A college education will (hopefully) increase future earnings potential, making it a worthwhile investment as well. Proceed with caution if you are considering taking out a home-equity line of credit for large purchases such as a vacation or vehicle; there are better ways to borrow for such things.

Taking home-equity cash out refinance can be a sensible option. It reduces interest payments on your existing mortgage, and allows you to borrow money at a very attractive low rate. However, be sure to calculate the total interest paid through the amortization process to discover the true cost of the loan before moving forward with a cash-out refinance. Once you are sure that the savings outweigh the costs, refinancing your home can be a very sensible option.

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