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Thursday, 30 May 2013

When is Refinancing Ideal?

By Jason Gordon


Traditionally, people have an option to pay off their existing loan and replace it with a new one. This process is what we call as "refinancing" a mortgage. However, what's very important for homeowners is to have a clear understanding of what your financial objectives are. More importantly, you have to keep these objectives in mind so that you will be able to acquire the loan that's most appropriate for you. This article will look at a few of the major reasons as to why people decide to refinance their mortgages.

What are the Purposes of Refinancing?

A. To create wealth faster by safeguarding a lower interest rate- one of the main roles of refinancing is to decrease the interest rate your existing loan, as well as to decrease the monthly payment that you pay. Aside from saving cash, reducing your interest rate also increases the rate at which you build equity in your home.

B. To adjust your mortgage's length - you have two options when you want to adjust your mortgage:

1. Increase the term: you can reduce the amount that you pay every month but if it will increase your mortgage's term as well as the total amount you end up paying because of the interests you incur per month

2. Decrease the term: Mortgages in short-term basis generally means that you pay off your loan sooner than usual and you will face lower interest rates.

C. Changing from ARM to Fixed Rate Mortgage - with adjustable-rate mortgage or ARM, your payment has no "fixed" rate because it can increase or decrease in any period of payment. With this type of payment, your monthly payment will change as the interest rate changes.

On the other hand, there are some who find their selves uncomfortable with the possibility that their monthly payments could rise. In this case, it is better to switch to fixed-rate mortgage because you will have a steady rate and therefore, you become confident. Fixed-rate mortgage is also a great idea if you think that the interest rate will increase in the future.

Refinancing, as long as it helps you create equity quicker, shortens the term of loan, or reduce your mortgage payment, it can be a great tool. It can also be a great idea when you want to take control of your debt as long as you use it carefully. Always remember that you need to look at your financial situation and ask yourself how long you plan to continue living in the house and know how much money you will save by refinancing, before you start the doing it.




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