Mortgages and RefinancingRefinancing to Reduce Interest RateThe word mortgage comes from the French word "mort," which means "dead," and "gage," from Old English which means "pledge". According to Sir Edward Coke (who lived from 1552 to 1634), the term came from the doubtfulness of whether or not the mortgagor would pay the debt.In those days, if the mortgagor did not, then the land pledged as security for the debt was taken away. The land was considered 'dead' to the mortgagor. (In other words, as if the person never had it.) Nowadays, the term mortgage is commonly used to refer to a loan for the purpose of purchasing a property. Home mortgages are the most common type of mortgage. Unlike most loans, your home mortgage will be renegotiated before you've paid it off. In fact, you will have a 'life' of the home mortgage and a 'term' for the interest rate that you pay. The life of the home mortgage is commonly 20, 25 or 30 years. This represents the length of time in which your home will be paid off (if you pay regularly and with the specified amount). You will also have a term for the interest rate that you pay on your home mortgage. This is the length of time over which you will have an agreed payment schedule with certain additional conditions. In effect, this is the time period over which you've agreed to: Pay at a particular rate of home mortgage interest (either locked in or floating) Certain restrictions for additional payments (usually a certain percentage of the original home mortgage which you can put down each year) Certain restrictions for the increase of monthly home mortgage payments (usually a percentage of the specified monthly payment) Certain restrictions on your ability to renegotiate the home mortgage interest rate (which is determined by whether the mortgage is "open" or "closed") Penalties if you want to renegotiate the terms of the home mortgage before the specified time period of the contract is expired. This contractual agreement is normally from 6 months to 10 years. Note that many financial institutions will only negotiate terms for a home mortgage for 5 years or less. Mortgage Refinancing For many people, refinancing their mortgage is another way of saying renewal. Their bank or lender may call them up to to renew your mortgage. For other people, refinancing is a necessity because they need some extra money for the house. They want to make use of some of the capital that has built up in their property. This means that they need to negotiate for a new mortgage - at a new loan amount. And then again, it could be that your interest rate right now is too high, and you want to refinance to get that rate down. In a volatile interest rate market, it can be to your advantage to pay those penalty clauses and get yourself a better interest rate. Refinancing for Credit Problems Unfortunately, in this day of high consumer debt, more people than you'd like to think will find themselves with this problem. Refinancing for credit or debt problems is not something that you should do without help. Lenders are likely to 'punish' the person who is in this situation with high interest rates, and other penalties and fees. Be sure to seek a reputable credit counseling organization, who can act as your advocate. And take action sooner as opposed to later. Equally unfortunately, credit problems often get worse before they get better. A reputable credit counseling agency can help them get better much more quickly, and help you in the adverse credit remortgage. And you don't want to lose your home. Refinancing for Extra Cash With the cost of homes, it's often better to buy what you can afford and remodel later! Once you are ready to remodel, particularly if you've lived in the house for a few years or have some equity built up, you may find that your best option is to refinance. Most lenders are willing to discuss refinancing to get you some more money. What they are really doing is looking at the current value of your home versus the amount you have mortgaged, and they give you some cash back from the difference. This means that your mortgage gets bigger - and the cash difference comes to you. This can be a better deal than negotiating for a separate home improvements loan, but be careful! You always have to read the fine print: 1. Be sure that you will not be paying fees to do this. Your lender already has your business, right? You are offering them more business, right? As long as you are a good customer, they should be thanking you! You are going to make them money. At worst, fees should be minimal, as long as your credit rating and history are good. 2. Be sure that the interest rate for your new mortgage is fair. Do some homework, and ensure that just because you are refinancing doesn't mean that your lender is taking an opportunity to get more out of you. 3. Be sure when you are comparing interest rates that you also look at the rates of home improvement loans. You may actually be better off to have a separate home improvement loan. However, it depends on whether you can handle the amount of the home improvement loan, as well as interest rate. Home improvement loans are often over much shorter periods than a mortgage. Therefore, even if the interest rate is much lower, you may have a payment which is too high for you to handle. So, you'll need to know both interest rates and payment amounts to compare home improvement loans with mortgage refinancing. 4. Be sure that your lender knows that you are comparing options. If you want your lender to compete for your business, you should be knowledgeable. Don't be browbeat into something because they are 'doing you a favor'. Once you have your cash in hand - happy renovating! Refinancing to Reduce Interest Rate When the rates are dropping, but you've still got some years on your mortgage and you're paying a couple percentage points more than the going rate, your best option is to approach your current lender and try to get an 'early renewal' on your mortgage. Some lenders will charge a penalty for early renewal. You will have to determine if the cost of the penalty is less than the savings you will get with the new mortgage. If not - you'll be best to wait. Some lenders will renew early without penalty, but will give you a 'blended rate'. What this means is you will have a 'new' mortgage, and you will be paying a rate that is a 'blend' of your existing interest rate and the new current interest rate. Confused? Don't worry. While it is a bit complex, it boils down to this - based on the term picked for the 'renewal' and the time left on your current mortgage, the lender will 'blend' the two interest rates. So you will be paying a 'blend' of your existing rate and the new lower rate. While you won't get a rate as low as the lender's current best rate, you should find that you will be paying a lower rate overall than if you'd stayed at your existing interest rate. Again, do your homework. This is only a good deal if you have a fair amount of time left on your mortgage, and you are confident that interest rates won't fall a lot further! If interest rates continue to go down, and you are now locked into a longer term at the blended rate, you may find that it wasn't a good deal |
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