How can a refinancing mortgage help your business?

2007-06-04T09:48:00.000-07:00

It seems that everywhere we look, there are advertisements for loan refinancing. Before we continue with how this type of loan can help you in your business, lets define what is a refinancing mortgage. Refinancing is to apply for a secure loan (backed by an asset, most common a house) to replace an existing loan.

Why refinancing? It could be used to reduce interest costs, (you will refinance at a lower rate), reduce risk (if you have a variable loan (for example, in a period of raising interest rates, you could refinance a variable loan with a fixed interest one) or reduce your monthly payment obligations, for example, by taking a longer term loan. Also, you can use the mortgage refinance to cash out some or all of the equity that may have accumulated in your home.

So how can a loan refinance help me in my business?

The most obvious reason to refinance is to pay off high interest debt, such as credit card debt with lower interest debt (like mortgage debt). Also, by using mortgage debt to pay off credit card, or other debt (e.g. car loan debt), you can transform non-tax deductible debt into tax-deductible rate, by using mortgage refinancing. This can potentially lower your tax obligations.

How can I take advantage of the equity built into my home with a mortgage refinance?

Home Equity Line of Credit and Home Equity Loan

The Home Equity Line of Credit (HELOC) is an open-ended credit line secured by a second deed to your house. In sum this equity mortgage allows you to borrow against the equity of your home. You can take out as much as is allowed on the credit line, which works just like a credit card. You can either pay it down or make the minimum payment; interest is calculated monthly. A Home Equity Loan is a second mortgage loan against your house. In contrast with a HELOC, you receive the amount at once and pay interest on the entire amount.

Advantages of a HELOC or Home Equity Loan

They generally have lower interest rates than unsecured debt such as credit cards. A home equity line is perhaps the cheapest method of financing.
You may be able deduct the interest you pay on a HELOC or Home Equity Loan on your tax returns.

Disadvantages of a HELOC or Home Equity Loan

Your home is pledged as collateral. You can lose your home if you default on payments.
If you sell your home before paying for the home equity loan or the HELOC against your property, you will realize a smaller profit from the sale of your home. This is because you are borrowing against your accrued equity, with an equity mortgage loan.
Home equity lines may impose fees for closing your account too quickly after opening it.

How To Determine Which Mortgage Is Right For You?

The choices that you have facing you when it comes to picking the right mortgage does not make it easy to get a good one. To make it worse, there are possibly so many different options with each one that you would almost think it was made to deliberately confuse. In order to make your selection easier, here are a few things you need to know.

Before you actually start looking, you should sit down and think some things through. One of these important things to consider is how long do you want to take to pay on your mortgage. You receive much greater savings for fewer years. A standard mortgage is 30 years, but you can also get 15, 20, 40 and even 50 years.

The next thing you want to do is to become a watcher of market interest rates for a while. By watching them go up and down, you will know when it is a good time to get an excellent rate. It will also indicate to you (don't just take the lenders word for it), whether you should get an adjustable rate mortgage (ARM) or a fixed rate mortgage. Of course, if you should make a mistake, or the economy changes significantly, you can always refinance down the road.

A fixed rate mortgage is the way to go when the interest rates are either on the way up, or if you simply want something that is stable and cannot cause you problems later. With an FRM, you always know what your payments will be. An adjustable rate mortgage, however, will give you lower rates when the interest rates are down, but can cause a problem if that changes.

Sometimes, lenders encourage people to get an ARM because it would allow you to buy a larger house. While this is true, it does not mean that you will be able to make the payments once the adjustable interest rate part of the mortgage becomes activated. It is a good idea to stick to the general rule of 36% total indebtedness (required by prime lenders) as a wise guideline for healthy finances.

Watch out for those mortgages that promise a lot. While they may deliver up front - it is what you do not see that can cause problems. It is a real good idea to familiarize yourself with the types of mortgages out there so you can be a careful consumer. There are some real traps when it comes to some mortgages and some lenders.

You also want to get several quotes from more than one lender so you have something to compare. Look at the various fees, the total cost, the interest rate, and more. You will quickly discover that not all lenders give the same deal. It will not take you long to find one or two that will stand out – then make your choice for the best deal.

Then you want to see if there might be some ways to get a greater savings. This can be done be reducing your indebtedness, and raising your credit score. You should check on this before you apply. It is also possible to reduce your interest rate even more by possibly buying points, or by making a larger down payment. Be sure that you at least consider these money saving options.

How to Choose the Best Mortgage Lender?

If you are in the process of refinancing your mortgage loan comparison shopping will help you choose the best lender. There are a number of costly mistakes homeowners make when choosing a mortgage lender. Doing your homework and carefully researching mortgage lenders will help you avoid making these mistakes; here are three tips to help you avoid making costly mistakes when refinancing your mortgage loan.

I. Look for a Lender With Good Customer Service

Customer service is an important aspect of choosing a lender but it should not be the deciding factor. Mortgage lenders routinely sell mortgage debt on the secondary market; the lender you choose today could very well turn around and sell your mortgage to another lender tomorrow. Customer service is however an important aspect of closing on your mortgage loan. It is important to remain in communication with your loan representative to ensure the interest rate guarantee you receive does not expire before your closing date. If you find a lender is unresponsive to your phone calls or emails you might consider using a different mortgage company.

II. Avoid Excessive Fees and Yield Spread Premium

Mortgage lenders often try and slip excessive or unnecessary junk fees past borrowers that don’t know any better. To avoid overpaying for your new mortgage it is important to do your homework and research lenders prior to applying. By comparing a variety of loan offers across many lenders you will be able to easily recognize junk fees. Yield Spread Premium is the markup your mortgage company or broker adds to your loan to collect a bonus from the wholesale lender. To learn how to spot Yield Spread Premium and avoid paying the markup, register for a free mortgage guidebook using the links below.

III. Choose a Lender With a Variety of Programs

Comparison shopping from a variety of lenders with a wide range of mortgage products will help you find a mortgage tailored for your financial situation. The more time you invest shopping for the most competitive lender, the more you will save. When you compare loan offers it is extremely important to compare all aspects of the offer, not just the interest rate. Homeowners that focus solely on mortgage interest rates often overpay for everything else from origination fees to closing costs.

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How to Negotiate With Your Loan Representative for the Best Terms and Rates

Proper negotiation with your loan representative will save you thousands of dollars and many headaches when mortgage refinancing. Asking your loan representative the right questions will help you avoid paying Yield Spread Premium on your mortgage rate and many other costly mistakes homeowners make. Here are several tips to help you negotiate with your loan representative for the perfect loan when mortgage refinancing.

Your first priority when mortgage refinancing needs to be avoiding Yield Spread Premium. Your ability to avoid Yield Spread Premium will make or break the deal you get when mortgage refinancing. What is Yield Spread Premium? This is the markup your loan representative adds to your mortgage interest rate in order to receive a bonus from the wholesale lender.

Your mortgage company already receives the origination fee you pay for arranging your loan; however, for every .25% you agree to overpay on your mortgage rate, that company receives 1% of your loan amount as an incentive for overcharging you. That’s right; your loan representative receives a bonus for overcharging you. How does negotiation help you avoid paying this markup? Tell your loan representative you will not pay any markup of your mortgage interest rate by their company. Tell that person you will pay a reasonable origination fee for their part mortgage refinancing.

A reasonable origination fee is no more than 1-1.5% of your loan amount. Next, tell your mortgage representative you will pay no more than $400 for the loan processing fee and any necessary closing costs. Check your good faith estimate for anything that resembles an application fee, lock fee, or courier fee. These are mortgage company junk fees you should tell your loan representative that you will not pay.

As you can see, mortgage “negotiation” is more like delivering your terms for mortgage refinancing. If the loan representative refuses to accept your terms, simply find another company that will. There are hundreds if not thousands of mortgage companies competing for your business, and that competition is fierce. State your terms, stand your ground, and you can avoid overpaying when mortgage refinancing.

Home equity loans give individuals a tool to extend their existing credit line by securing debt on the equity value of their existing homes. This access to easy and cheap money can lure the borrower into securing a debt for reasons which otherwise could have been funded through wise money management.

Home Equity Loan Risks

Following are some home equity loans risks:

Risk of losing one's home:

The biggest risk involved in home equity loans is that of the borrower being rendered homeless. In the case of the borrower being unable to make timely payments of the interest and the principal, the lender can claim the existing house of the borrower. Thus a default in payment can lead to the loss of the home, which is used as collateral for the loan.

Hidden loan conditions:

Consumers who do not pay careful heed to the fine print may fall prey to the intrinsic conditions of the home equity loan, particularly those pertaining to principal and interest payments. For example, a balloon payment of the principal may add to the debt burden of the borrower and the inability to make the payment may result in foreclosure and thus loss of the borrower's house. The lender may also impose legal and procedural fees later on in the term of the loan, which may affect the actual amount payable by the consumer.

Higher interest payments:

If the equity loan is financed at a floating or variable rate, then it is subject to changes depending on the interest rate scenario in the economy. This may be because the interest payments fluctuate out of the bounds of the borrower's reach.

Besides these major risks, the home on which the loan is secured cannot be leased during the term of the loan. The loan on home equity will also effectively increase the time required to pay off the debt on the existing home.

Many times, the easy availability of an equity loan can tempt a consumer to take the loan for day-to-day expenses, which actually add to his existing debt burden.

The investment made by the money raised through raising an equity loan should be financially more rewarding than the interest paid on the loan.

All these factors should hence be taken into consideration before taking a home equity loan.

About the Authors:

Joe Kenny writes for Rebuild.org, offering mortgage loans, or visit NationsFinance.co.uk is you are UK resident for UK mortgages

Louie Latour specializes in showing homeowners how to avoid costly mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinance Information - What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.

Home Equity Loans www.american-home-equity-loans.com - Rates, in depth articles and professional second mortgage advice. Find the lowest home equity loans rates and lenders.

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Mortgage Refinance, Equity Mortgage Loan Information

How can a refinancing mortgage help your business?