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Saturday, August 11, 2012

Refinancing terms

A “refinance” refers to the replacement of an existing mortgage(s) with a new home loan.  Paying off an existing loan with the proceeds from a new loan, almost of the same size, and using the same property as collateral. In order to decide whether this is worthwhile, the savings in interest must be weighed against the fees associated with refinancing.

An example would be a 3-year ARM. The first three years are fixed, and then the mortgage becomes adjustable, based on the margin and index tied to the loan. At or before this first adjustment, borrowers will look to refinance to avoid the impact of the fully indexed rate, assuming it’s higher than the initial rate.
 Other reasons to refinance include reducing the term of a longer mortgage, or switching between a fixed-rate and an adjustable-rate mortgage. If there are prepayment fees attached to the existing mortgage, refinancing becomes less favorable because of the increased cost to the borrower at the time of the refinancing.

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