By Simon Volkov
Mortgage refinancing can be beneficial to borrowers who need to reduce monthly loan installments or want to take advantage of reduced interest rates. It can also offer a solution to those in preforeclosure; meaning banks have not taken legal action to repossess the property.
A second type of mortgage refinancing is that of cash back mortgages. This option allows borrowers to obtain lump sum cash using accrued home equity. Since home loans are assessed with a lower rate of interest than other types of loans, entering into a cash back mortgage might be a smarter option when funds are required for large purchases.
Refinancing requires mortgagors to apply for a new home loan. Proceeds from the new loan are used to pay off the previous loan. Borrowers must possess sufficient credit scores and payment history to qualify for financing. Those with bad credit, mortgage arrears, or high debt-to-income ratios typically will not qualify.
Many homeowners refinance through their current lender. However, it is always smart to shop around and compare lender rates. It is also smart to review current loan documents to determine if prepayment penalties exist.
Many banks include a prepayment clause within the ‘Truth in Lending’ section. In many cases, prepayment penalties are assessed during the first 5 years. Others reduce penalties annually throughout the duration of the loan.
Borrowers often fail to read loan contracts and are shocked to discover they are penalized for early payoff. Mortgagors holding two or more mortgages can take a hard financial hit when refinancing.
Mortgage lenders typically assess closing costs for refinanced loans. Fees can be as much as 6-percent of the outstanding principal and interest. Common refinance fees include: loan application, loan origination, title search, land survey, property inspections and appraisals, and legal expenses. Cost to refinance a $200,000 mortgage could hover around $12,000.
One source for borrowers facing foreclosure is Making Home Affordable. This government-sponsored program offers solutions to those struggling to meet mortgage obligations under Home Affordable Refinance Program (HARP).
HARP eligibility requirements are provided at MakingHomeAffordable.gov, but may vary by lender. The program is offered to borrowers with Fannie Mae or Freddie Mac loans who are current with loan installments and have not been more than 30 days late with payments within the previous 12 months.
Borrowers can apply for HARP mortgage refinance as long as the outstanding balance of their current mortgage does not exceed 125-percent of current market value and they have the financial ability to comply with new payments.
Another credible source for borrowers in need of mortgage assistance is the Department of Housing and Urban Development. HUD provides complimentary housing counseling to those facing foreclosure; in need of loan modification; or assistance with refinancing home loans.
HUDs website includes an entire section dedicated to mortgage refinance. Visitors can download lender comparison guides and financial worksheets; locate local housing counselors; and learn about all available programs at HUD.gov.
Mortgage refinance can be a good option as long as borrowers conduct due diligence and carefully weigh the advantages and disadvantages of taking out a new home loan. Borrowers should only engage this option if doing so makes smart financial sense.
For most people, their home is the most valuable asset owned. Borrowers should pursue all available options to protect it. Making poor financial decisions or engaging in wasteful spending can quickly place real estate at risk for foreclosure. Take time to assess the risks and rewards of mortgage refinancing before entering into a new contract.
About the Author: If you are considering mortgage refinancing it is crucial to research every available option and compare home loan providers. Author and real estate investor, Simon Volkov shares insights and resources to help homeowners make informed decisions at SimonVolkov.com.
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