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LESSON 29: REFINANCING
There are reasons to refinance even if doing so
won't lower your payment much and will take a long time to pay off.
You may want to convert from an ARM
to a FRM
to eliminate drastic payment fluctuations. Or, you might want to
convert from a 30-year
loan to a 15-year
one in order to build equity
more quickly. Borrowers who need money to pay college tuition or
pay off other debts can convert some of their equity into cash via
a cash-out
refinance.
Refinance options:
1) Rate-and-term refinance:A
rate-and-term refinance is the process of paying off one loan
with the proceeds from a new loan using the same property as security.
A rate-and-term refinance takes advantage of lower interest rates,
or a shorter term to build equity faster.
2) Cash-out refinance: A refinance transaction
in which the amount of money received from the new loan exceeds
the total of the money needed to repay the existing first mortgage,
closing costs, points, and the amount required to satisfy any outstanding
subordinate mortgage liens. In other words, a refinance transaction
in which the borrower receives additional cash that can be used
for any purpose. Generally, your cash-out
refinance is limited to 75 percent of the total value of your
home.
As for the actual lending process, refinancing your
current mortgage is very similar to getting a loan to buy a home.
It involves many of the same steps and the same types of closing
costs. Borrowers who don't have spare cash lying around need
not despair. They can agree to pay higher rates in exchange for
having their lenders pay their costs or increase their new loan
balances enough to pay those costs at closing. Doing either of these
things, however, will increase the total interest cost of the new
loan.
(continued on next page)
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