Why do people refinance? All for different reasons, of course, but the most common ones are:

• To obtain a lower interest rate,
• To build the equity of their property faster,
• To change the type of their loan,
• To take advantage of an improved credit rating,
• To get some cash out of the equity already built in the home.

How does it work?

Obtaining a lower interest rate is probably the most popular reason to refinance. One may have an adjustable rate mortgage with a rate gone too high, or a high-rate mortgage resulting from negative points, or an above-the-average rate caused by the poor credit score at the time of the loan origination, or it may have been a very sensible loan all the way until mortgage market interest rates dropped. Refinancing in such and such like situations can save you quite some money, but you have to be very thorough in estimating the benefit. The main question is whether the amount saved will be worth the amount paid. The procedure of refinancing is not cheap, so you have to make sure, that the money you pay for it will not only return to you, but also gain you some profit as savings on the interest, as compared with your current loan.

One of the decisive factors is Read the rest of this article »

Points are quite a useful tool helping a borrower to lower the interest rate on his mortgage loan. The price of one point equals to 1% of the amount you borrow. If you pay this 1% amount in cash at the loan origination, the interest rate of your loan will drop by usually 0.25 percentage points. Each new discount point bought lowers the loan interest rate by another 0.25 percentage points. Thus, a 7% original rate can be reduced to 6.5% by buying 2 points. Sometimes the 0.25 percentage points off the rate become pricier if you go for more than 2 discount points. The lender may require that you buy, say, 3.5 discount points to reduce a 7% rate to 6.25%.

You cannot buy your interest rate totally out, though. Usually lenders offer several combinations of the rate and points for you to choose from.  If you see a 7% and 2 points offer in an ad, it is not very likely to be the only option available. All you have to do is ask.

Even though the idea of discount points looks rather attractive, I find it important to draw your attention to a number of subtle matters involved, and help you avoid any financial losses that may occur if the points get to be applied inappropriately.

Read the rest of this article »