Mortgage loans are taken to finance the purchase of a property. The property could be commercial or residential and different mortgage rules apply to different types of properties. There are two parties usually involved in the contract – the borrower who applies for the loan and is the owner of the property and the lender who provides the loan for the purchase. The mortgage lender is usually a bank or some other financial institution. Sometimes lenders are also considered to be investors who will own an interest on the amount mortgaged.
Home refinance refers to replacing the existing home loan with a different debt under different terms. There are many reasons why a homeowner wishes to seek a home refinance option. The most common of them all is to take advantage of a better interest rate. Other reasons include consolidating debt, reducing monthly payments, reducing risk by shifting to a different type of loan – e.g. shifting from variable rate to fixed rate loan and finally to free up money that is locked in the mortgage.
Most borrowers will seek the home refinance option to reduce their debt burden when they have other expenses they need to take care of. There are some critical factors that you must consider when opting for home refinance. These include:
• Seasoning period
• Penalty for early closure
• Closing and other miscellaneous costs
• Break even analysis
The seasoning period clause is added in most home mortgage contracts. This ensures that a homeowner cannot apply for home refinance unless he has lived in the house for a minimum period – say 2 years. Hence, homeowners cannot refinance too early for this could mean a loss to the bank by way of future interest payments. If an individual exits his mortgage early, he will have to pay certain penalties for early closure. Some of these costs will already be included in the existing mortgage and the homeowner will have to pay this before applying for a refinance mortgage. Only after paying off these penalties, can he apply for a new loan.
Read loan penalty details carefully and do not take one that includes a prepayment penalty. Knowing how much a home refinance will cost is critical before opting for one. Seek the advice of expert financial consultants and do not rely on your own calculations for you could end up paying very heavy closing and other miscellaneous costs. Preparing a break even analysis report will help you save and not lose money on home refinance.
When you begin paying a loan, you will pay more than you save. At one point, you will break even which means from that point, you will recover what it cost to refinance your home loan including all closing costs and fees. Those who plan on occupying their house for a short period should conduct this break even analysis and once all costs have been recovered, they can apply for a home refinance again. Break even analysis can aid a person in calculating how much they will save every month and how long it will take to break even.
Whether you are seeking a new home mortgage or home refinance loan, using a mortgage calculator can benefit you greatly. Mortgage calculators are used by those who want to calculate exactly how much they will need to borrow to buy a house and their monthly payments thereafter to repay the home mortgage loan. Mortgage calculators help users calculate realistic interest rates between different types of home loans which will include monthly fees also. Mortgage calculators are helpful because you can input different figures for the same set of parameters and study which option will suit you the most.
While a mortgage calculator can be purchased in the market, it is easier to use the free tool offered on the Internet. Just make sure the one you use allows you to modify the most number of variables. Input different details like cost of the property, interest rate and loan period and you will instantly receive an estimate of your monthly repayment amounts. Make sure you verify the figures by using the same calculator at least twice. Also, use different types of calculators, for some can use different methods of calculations. Only then will you be able to arrive at a realistic estimate and make a wise decision as far as your home mortgage is concerned.