Common Mistakes When It Comes To Refinancing Refinance Mortgage Now Could Be A Good Time To Refinance Credit Repair Maintain The Correct Debt To Credit Ratio Is It Time For You To Re Finance
There are many reasons for refinancing your mortgage. Refinancing can reduce your interest rates, your monthly payment, or both. Often, refinancing is an effective way to consolidate debt and to reach your long term financial goals.
However, there are many common mistakes when it comes to refinancing, some of them so serious they could cause you to lose your home. Identifying pitfalls is the best way to make a refinancing decision you will not later regret.
When refinancing, you do not want to eliminate all the equity you have worked so hard to build. Home ownership is all about building equity – it is the equity in your home that makes it one of, if not the most valuable investment you will ever make.
This does not mean refinancing your home is always a bad financial decision – in fact, often refinancing can be a big step toward reaching your long-term financial goals. And it is the equity in your home that allows you to refinance in the first place. What you want is a loan that allows you to borrow against some – but not all – of your equity.
The most common mistake homeowners make with regards to canceling equity is cash-out refinancing. On the surface, cash-out options can appear extremely attractive, because they allow you to take cash out of your loan amount and put it in your pocket. You can use the cash to pay off debt, but taking cash out reduces the equity in your home, and can even eliminate it altogether.
To avoid this refinancing pitfall, consider a second mortgage as an alternative to refinancing with a cash-out option, especially if the interest rate is higher on the new cash-out loan. Already have a second mortgage? Then refinancing with a cash-out loan is very likely to eliminate all your equity. Instead, you can refinance both mortgages into one new mortgage with a cash-out option.
Another form of refinancing homeowners might regret is refinancing from a fixed rate mortgage (FRM) to an adjustable rate mortgage (ARM). Homeowners often do this to lower their monthly payments, but with an ARM, the interest rate is not locked in. Sure, the payments may be lower now, but if interest rates go up, future payments could be higher than the payments you were trying to reduce.
Refinancing options that homeowners are not likely to regret include refinancing from an ARM to an FRM in order to lock in a low interest rate. This is a decision that is usually made with long-term financial goals in mind.
Another refinancing decision that is generally sound is refinancing to the same type of mortgage with a lower interest rate than the current loan. So long as the borrower expects to remain in the home long enough for the interest savings to cover the cost of refinancing, the borrower usually will not regret this decision.
Low interest rates and a lucrative real estate market have prompted many homeowners to consider refinancing. But with predatory lending on the rise, it is up to you, the homeowner, to protect your investment. Fortunately, the Federal Truth in Lending Act is a safeguard for those who refinance a loan on their primary residence with a different lender. This Act guarantees borrowers the “right of rescission,” meaning they can cancel the debt within 3 days of closing. Not many borrowers take advantage of this option, but those who do are not stuck with a refinancing decision they will come to regret.
The mortgage market is currently experiencing an increase in rates as 30 year mortgages rates push slightly over six percent, and 15 year mortgages move over the 5.50 level. Both of these loan rates assume that you would be putting 20% down at borrowing, which is customary amongst most commercial lenders. While most people are hesitant to move into the market at these rates, there exist other options you could possibly take advantage of. The federal government is attempting to ease the crisis in the mortgage market with the Federal Housing Administration. Passing new legislation, the government hopes to spur on new applications by allowing lenders to introduce mortgages with only a 3% down payment.
For a first time home buyer with not much savings this could be an extremely welcome opportunity. Additionally, buyers who are in a bit of trouble with plummeting market rates may be able to benefit from FHA backed refinancing. In August, the government allowed over 200,000 homeowners to refinance, and now additional people may be able to refinance their home down to its current market value, giving people and incentive to stay in the home. The FHA is now getting authority to refinance homes that are in the $700,000 range, were as before, they were only allowed to come in on loans in the high 300s.
Families looking to get into a home fast, who have suffered from the recent recession, may find FHA backed loans quite attractive. The down payment requirements, which now stand at 3%, may be lowered to 1.5%. Moreover, there is no credit history requirement and no fixed income requirement either. But, you do have to pay an upfront premium for these reduced lending guidelines, which amounts to 1.5% of the loan total at closing, and half a percent every year. Not too bad on a reasonable mortgage, especially when compared to a 20% down payment.
For potential buyers, home prices look pretty attractive right now, with the median national home price just under $240,000. Prices have fallen recently, just a bit, to make the market even more attractive. People are rushing to buy homes in areas that have had record numbers of foreclosures. The inventory in hard hit states like California, Florida, and Utah is truly stunning. If you are an eager home buyer, who has some cash saved, now is a great time to be searching for a great deal. And with so many people and institutions looking to sell homes as fast as they can, you may walk away with the deal of a lifetime.
Many people believe that paying off their credit cards every month is a good idea. And if you are trying to stay out of debt, then I would have to agree with you. If you are trying to build credit and look good to your creditors, then paying off your credit cards every month is actually a bad idea. Let me explain.
Creditors and lenders don’t make there money from annual fees on credit cards. They make there money on the interest that you pay each month. If you are paying off your balances each month, the creditors and lenders aren’t making any money. Creditors want to see someone that can maintain a balance each month and make payments on time. This goes a long way in showing your credit worthiness and actually is built into the algorithm that calculates your credit score.
Your debt to credit ratio is very simple to calculate. Suppose you have a credit card with a $10,000 limit. If your balance on this card is $2500 then your debt to credit ratio would be 25%. A good ratio to maintain to help raise your score would be between 30-35%.
Your ratio is based on all your credit card limits and balances and combined. This actually gives you some flexibility.
If you had a limit on one card of $5000 and a balance of $3250 then your debt to credit ratio would be around 75%. To fix this you could pay off a big portion of your balance or you could ask the creditor to raise your limit to $10,000. The latter costs you no money but alters your ratio to around 35%. With multiple cards there are many combinations to achieve a good credit ratio by upping the limits on some cards and paying down others. I think you get the idea.
It may not be necessary to maintain this high ratio on your credit cards all the time. Use this technique to build your credit fast. If you will soon be in the market to get a home loan or auto loan, perhaps begin moving towards this ratio several months before shopping for a loan. Once you get a loan you can let this ratio go down to something more manageable.
This is just one little technique that can have huge ramifications on your credit score. I hope it helps. And remember to make all your payments on time. This can’t be stressed enough. Those 30 and 60 day late payments will kill your credit faster than you can repair it. Good luck!
Whether or not to re-finance is a question homeowner may ask themselves many times while they are living in their home. Re-financing is essentially taking out one home loan to repay an existing home loan. This may sound odd at first but it is important to realize when this is done properly it can result in a significant cost savings for the homeowner over the course of the loan. When there is the potential for an overall savings it might be time to consider re-financing. There are certain situations which make re-financing worthwhile. These situations may include when the credit scores of the homeowners improve, when the financial situation of the homeowners improves and when national interest rates drop. This article will examine each of these scenarios and discuss why they may warrant a re-finance.
When Credit Scores Improve
There are currently so many home loan options available, that even those with poor credit are likely to find a lender who can assist them in realizing their dream of purchasing a home. However, those with poor credit are likely to be offered unfavorable loan terms such as high interest rates or variable interest rates instead of fixed rates. This is because the lender considers these homeowners to be higher risk than others because of their poor credit.
Fortunately for those with poor credit, many credit mistakes can be repaired over time. Some financial blemishes such as bankruptcies simply disappear after a number of years while other blemishes such as frequent late payments can be minimized by maintaining a more favorable record of repaying debts and demonstrating an ability to repay existing debts.
When a homeowner’s credit score improves considerable, the homeowner should inquire about the possibility of re-financing their current mortgage. All citizens are entitled to a free annual credit report from each of the three major credit reporting bureaus. Homeowners should take advantage of these three reports to check their credit each year and determine whether or not their credit has increased significantly. When they notice a significant increase, they should consider contacting lenders to determine the rates and terms they may be willing to offer.
When Financial Situations Change
A change in the homeowner’s financial situation can also warrant investigation into the process of re-financing. A homeowner may find himself making considerably more money due to a change in jobs or considerably less money due to a lay off or a change in careers. In either case the homeowner should investigate the possibility of re-financing. The homeowner may find an increase in pay may allow them to obtain a lower interest rate.
Alternately a homeowner who loses their job or takes a pay cut as a result of a change in careers may hope to refinance and consolidate their debt. This may result in the homeowner paying more because some debts are drawn out over a longer period of time but it can result in a lower monthly payment for the homeowner which may be advantageous at this juncture of his life.
When Interest Rates Drop
Interest rates dropping is the one signal that sends many homeowners rushing to their lenders to discuss the possibility of re-financing their home. Lower interest rates are certainly appealing because they can result in an overall savings over the course of the loan but homeowners should also realize that every time the interest rates drop, a re-finance of the home is not warranted. The caveat to re-financing to take advantage of lower interest rates is that the homeowner should carefully evaluate the situation to ensure the closing costs associated with re-financing do not exceed the overall savings benefit gained from obtaining a lower interest rate. This is significant because if the cost of re-financing is higher than the savings in interest, the homeowner does not benefit from re-financing and may actually lose money in the process.
The mathematics associated with determining whether or not there is an actual savings is not overly complicated but there is the possibility that the homeowner will make mistakes in these types of calculations. Fortunately there are a number of calculators available on the Internet which can help homeowners to determine whether or not re-financing is worthwhile..
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