Loan Refinance – When To Do It

2007-03-08 10:33:40

( Financial )



Loan refinance is seeking for a new loan to pay an outstanding loan using the same collateral. Home mortgage loan is the most popular in loan refinancing. There is also the student loan refinance for students applying for new loans to support their college education.

You can also avail of the Federal Housing Administration's Refinance Program or fha refinance. In order for you to qualify, you must have a stable job or
steady job meaning you've been working in the same company for more than two years. You must also provide evidence of a fixed or increasing income.

You can also qualify for fha streamline refinance if you are not delinquent in your mortgage payments and your mortgage is currently insured with FHA. This type of refinance can help lower your monthly and principal payments.

Loan refinance is attractive if a bank offers interest rates that are lower compared to the rates of your existing loan. Refinance your loan only when the offered rate is lower, around 1.5% of your existing interest rate. Lower rates would mean lower monthly payments on your loan amortizations. An example of this is converting your adjustable rate mortgage (ARM) to a fixed-rate mortgage. Since ARM is usually for short-term loans, interest rates are variable. So if interest rates in the market shoot up, the ARM rate of your existing short-term loan will also increase.

If you intend to refinance your home mortgage loans, consider how long you will be staying in your home. If you stay longer, say more than four years, it is better to get a fixed rate mortgage. The same is true if you will only stay for a short time. Better get an ARM and avail of lower monthly payments than apply for a fixed term loan.

Loan refinance can also be used to lower your monthly mortgage payments. If you have a 10 year loan, you can convert this to 20 years to have lower monthly payments. Others however prefer long-term savings. Hence, they convert their 20 year loan to 10 years only.

Also, you can resort to loan refinancing if you want to pay an existing obligation or if you want to cash in on your equity that has piled up in the secured assets of your existing loan.

Refinancing programs of other banks also offer alternative payment schemes. From the traditional principal and interest payments collected every month, they only require interest payments from their borrowers.

However, you must remember that some loan agreements stipulate penalty fees for early repayment of loans. You must be careful in weighing the benefits of securing another loan to pay back your existing loan.

Careful study of computations and breakdown of interest payments will greatly aid you in making a wise decision in refinancing your loan.


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