Refinance Loans Explained
How do refinance loans work?
Refinancing a home loan can be one of the best financial moves many individuals make in their lifetimes. So why refinance? What key features and points should property owners look out for? What are the most important things to look for in a refinance loan?
What is a Refinance Loan?
A refinance loan is the re-financing or restructuring of a mortgage loan. In contrast to a loan modification or second mortgage loan, a refinance is a completely new loan which replaces existing mortgages in place. During this process the old loan will be paid off and satisfied, and a new mortgage will be recorded on the property which is acting as collateral.
Why Refinance Your Property?
There are many reasons for refinancing a mortgage loan.
The chief purposes and types of refinance loan include:
- Cash out refinances
- Rate and term refinances
- Home improvements
- Debt consolidation
Cash Out Refinancing
Cash out refinancing can give property owners the opportunity to recapitalize after buying a home or investment property for cash, to tap pent up equity which could be used to invest in more properties, or to provide for major life expenses such as college tuition, medical expenses, or starting a business.
Rate and Term Refinance
A ‘rate and term’ refinance offers the chance to lower loan interest rates and extend or shorten the length of the long to either pay it off faster or reduce monthly payments.
Refinance loans can also be taken out to invest in home improvements, or to consolidate debt and reduce overall interest and payments.
LTV – the Loan-to-Value ratio you’ll be borrowing.
APR – the true Annual Percentage Rate including interest and closing costs.
Closing Costs – of which there can be either lender and third party costs, or lenders can absorb them for a no closing cost loan, or roll them into the new loan so no money is due out of pocket.
Tangible Net Benefit – is a requirement ethical lenders have to show to avoid predatory lending or poor financial management by borrowers.
2 deciding factors to keep in mind when shopping for a potential refinance loan include:
- How well the loan helps achieve the main goal and objective
- How long it will take a refinance to pay for itself versus how long the borrower plans to retain the property
For example; if a refinance will cost $2,000, and save the borrower $200 per month thanks to a lower interest rate, the refinance will pay for itself within 10 months. Every month after that there is a true net savings of $200. That’s $2,400 per year.
The Process of Refinancing
- Determine your priorities and objectives
- Shop for the best refinance loan rates
- Make your loan application
- Submit any required documentation
- Obtain final loan commitment
- Close your loan and receive your funds
In summary; a refinance loan can be a very prudent financial move, if you know what you are looking for. Don’t forget to look out for alternatives such as second mortgages, home improvement loans, and home equity lines of credit too.