What exactly happens when you refinance an existing loan or loans?
Many homeowners go into the process of refinancing thinking that they need only consider what the interest rate is going to be and how many points it will cost to obtain a new loan.
The interest rate and points are only two factors in the process.
When you are refinancing an existing loan you will want to make sure that you obtain a new loan in an amount necessary to payoff the existing loan or loans, the interest on those loans, prepayment penalties, if any, reconveyance fees and recording fees.
The new loan you will be getting must also include escrow fees, title insurance fees, a new appraisal of your home, credit report fee, plus interest on the new loan and possibly impounds for property taxes and homeowners insurance, and your new lender fees. (Each lender has their own fees and charges.)
This leads us to an example; say you are paying off a $200,000 loan, just to cover all of the refinance costs, the loan amount needs to be in the neighborhood of $210,000. When additional cash-out funds are involved, you will want to add that number to the new loan amount.
So, if you want to get $50,000 out in cash with the new loan, your new loan amount will be approximately $260,000.
If, when you purchased your home, you went with 100% financing and need to payoff an existing first and second trust deed, remember that you will be paying interest on both as part of the payoffs of the loans.
Another item to think about is that if you purchased your home with 100% financing and you are ready to refinance, has your property value gone up enough to justify the additional funds needed to cover the refinance? You probably don’t want to be putting cash out of your pocket into the refinance.
When a lender is working on a refinance for you, it is possible to refinance your home up to 100% of its value, if you have really great credit and very few debts. Your debts compared to your income and your credit score is a large factor in determining how much of a loan you will be granted based on the appraised value of the home.
Giving yourself a little breathing room and getting a loan between 80% and 90% of the value of your home is a better move. That way, you can keep your house payments lower and you have room to get an equity line of credit or 2nd trust deed, if you need to at a later date.
This in turn, brings us to refinancing into a new loan or first trust deed and at the same time getting an equity line of credit. This equity line of credit need not be touched at the time of your new first trust deed but held onto just in case you need it at a later date. Many lenders will refinance you into a new first trust deed and not charge any up-front fees for giving you an equity line of credit.
Once the equity line of credit is in place, it is used very much like a credit card. Example; $50,000 equity line of credit, you borrow $10,000, your payments are based on $10,000, which is what you pay back, unless, of course, you borrow more, and so on.
The final item is that if, during the time that you have been paying on your current mortgage and you have had a few problems, either with making your monthly payments on time, medical problems, over your head in debt and making payments late, you can still refinance, even get out of debt, but, your interest rate will be higher and you may be granted a loan that has a fixed rate of interest for 2 to 5 years and comes with a prepayment penalty.
If this kind of financing gets you out of the trouble you may be in, that is a good thing. Now you have given yourself a second chance. Work on keeping your credit good, try not to get in over your head again and give yourself another couple of years when you can try again, get the loan you would really prefer and achieve your financial goals.
Patti Schopper's passion has always been to help people with their real estate and mortgage needs. Her goal has been to help people achieve their financial success. Visit Patti at www.socal-inlandempire.com
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