How to Refinance your Home - Loans Guide

Home Refinancing Basics

In recent years, millions of homeowners have taken advantage of low rates and refinanced their mortgages. This article describes the advantages and possible pitfalls associated with a "refi."

Before You Start

• Remember that refinancing to reduce debt can be a smart move, but refinancing in order to borrow more for consumer purchases (car, vacation, etc.) could set you back significantly.
• Read the fine print on your current mortgage to learn whether you'll be assessed penalties or fees for "getting out" of that loan early.
• Make sure you know whether you have a fixed or variable interest rate and what the terms are.

1.Home Refinancing Basics

In recent years, Americans seeking to take advantage of low interest rates have lined up to refinance their mortgages. In fact, refinancings hit an all-time high in 2003, and remained high in both 2004 and 2005, according to the Mortgage Bankers Association of America.
But while it's true that refinancing has the potential to help you reduce the costs associated with borrowing money to own a home, it is not necessarily a strategy that makes sense for every individual in every situation. So before you make a commitment to refinance your mortgage, its important to do your homework and determine whether such a move is the right one for you.

2. To Refinance or Not

The old and arbitrary rule of thumb said that a refi only makes sense if you can lower your interest rate by at least two percentage points for example, from 9% to 7%. But what really matters is how long it will take you to break even and whether you plan to stay in your home that long. In other words, make sure you understand -- and are comfortable with -- the amount of time it will take for your overall savings to compensate for the cost of the refinancing.
Consider this: If you had a $200,000 30-year mortgage with an 8% interest rate, your monthly payment would be $1,468. If you refinanced at 6%, your new monthly payment would be $1,199, a savings of $269 per month. Assuming that your new closing costs amounted to $2,000, it would take eight months to break even. ($269 x 8 = $2,152). If you planned to stay in your home for at least eight more months, then a refi would be appropriate under these conditions. If you planned to sell the house before then, you might not want to bother refinancing. (See below for additional examples.)

3. Remember -- All Mortgages Are Not Created Equal

Don't make the mistake of choosing a mortgage based only on its stated annual percentage rate (APR), because there are a variety of other important variables to consider, such as:
The term of the mortgage -- This describes the amount of time it will take you to pay off the loan's principal and interest. Although short-term mortgages typically offer lower interest rates than long-term mortgages, they usually involve higher monthly payments. On the other hand, they can result in significantly reduced interest costs over time.
The variability of the interest rate -- There are two basic types of mortgages: those with "fixed" (i.e., unchanging) interest rates and those with variable rates, which can change after a predetermined amount of time has passed, such as one year or five years. While an adjustable-rate mortgage (ARM) usually offers a lower introductory rate than a fixed-rate mortgage with a comparable term, the ARM's rate could jump in the future if interest rates rise. If you plan to stay in your home for a long time, it may make sense to opt for the predictability and security of a fixed rate, whereas an ARM might make sense if you plan to sell before its rate is allowed to go up. Also keep in mind that interest rates hovered near historical lows in recent years and are more likely to increase than decrease over time.
Points -- Points (also known as "origination fees" or "discount fees") are fees that you pay to a lender or broker when you close the deal. While a "no-cost" or "zero points" mortgage does not carry this up-front cost, it could prove to be more expensive if the lender charges a higher interest rate instead. So you'll need to determine whether the savings from a lower rate justify the added costs of paying points. (One point is equal to one percent of the loan's value.)

How Much Would You Save?
A homeowner with a 30-year, $200,000 mortgage charging 8% interest would pay $1,468 each month. The table below illustrates the potential monthly savings and the various break-even periods that would result from refinancing at different rates.
Rate After Refinancing	New Monthly Payment	Monthly Savings	Months to Break Even*
7.5%	$1,398	$70	29
7.0%	$1,331	$137	15
6.5%	$1,264	$204	10
6.0%	$1,199	$269	8
5.5%	$1,136	$332	7
5.0%	$1,074	$394	6
*Assumes $2,000 closing costs. Rounded up to the next highest month.

A Closer Look at Mortgage Fees

Using data collected during 2003, researchers at Bankrate.com determined the average fees charged to consumers who borrow money to buy a home. Based on a loan of $180,000, the fees broke down as follows: Average Lender/Broker Fees Administration fee: $336 Application fee: $205 Commitment fee: $498 Document preparation: $194 Funding fee: $228 Mortgage broker fee: $839 Processing: $320 Tax service: $73 Underwriting: $269 Wire transfer: $31 Third-Party Fees Appraisal: $327 Attorney or settlement fees: $445 Credit report: $29 Flood certification: $17 Pest & other inspection: $68 Postage/courier: $45 Survey: $174 Title insurance: $605 Title work: $200 Government Fees Recording fee: $76 Various taxes: $1,339

4. Stick With What You Know?

Finally, keep in mind that your current lender may make it easier and cheaper to refinance than another lender would. That's because your current lender is likely to have all of your important financial information on hand already, which reduces the time and resources necessary to process your application. But don't let that be your only consideration. To make a well-informed, confident decision you'll need to shop around, crunch the numbers, and ask plenty of questions.

Summary

• The decision to refinance should only be made if the long-term savings outweigh the initial expenses. To calculate your break-even point, divide the cost of the refi by your monthly savings. The resulting figure represents the number of months you will need to stay in the home to make the strategy work.
• Don't select a new mortgage based only on its annual percentage rate.
• Also evaluate the term of the loan, whether the interest rate is fixed or variable, and the relative merits of paying up-front fees in exchange for a lower rate.
• Your current lender already knows you and has your financial information on file, so you may be able to get a better deal that way, instead of going to a new lender.
• To get the best possible refinancing deal, you'll need to shop around, crunch some numbers, and ask a lot of questions.

Checklist

• Shop around and conduct a detailed cost assessment (with a financial professional, if necessary) to identify which mortgage offers the greatest financial benefits.
• Read the entire contract before signing. Don't let anyone pressure you or rush you to make a hasty decision.
• If refinancing results in lower monthly payments, use those savings to pursue other important goals, such as preparing for retirement and college costs.

NRI home loans on the upswing

BankBazaar.com

Most NRIs give a lot of thinking before investing in property in India and most of the time put off the plan due to effort, research and planning involved and in some instances if they do not have enough funds for the same. For such individuals there is always the NRI home loan.

RBI defines NRI as "An Indian citizen who holds a valid Indian passport and who stays abroad for employment or for carrying on business or vocation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad is a NRI."

The NRI loans are made available for the following purposes:

Purpose of the NRI Home Loan

Self-construction of a property on a plot of land.

Finance the purchase of a plot of land allotted by a society/development authority.

Renovate/improve an existing property in India.

Purchase of a house either under construction or on a resale.

Non-resident Indians are also permitted to purchase an existing house or flat. The RBI has not prohibited banks from providing financing to NRIs for the purchase of a second house, but the loan on the house is for the self-occupation of the NRI upon their return to India. Loans are also offered to NRIs against NRE deposits. These loans can be repaid out of NRE funds but the interest would be charged at a commercial rate. Loans to Non-Resident Indians are also provided against FCNR deposits. 

Difference between a normal & NRI Loan  

NRI home loans can be availed by any NRI with as much ease and convince as any resident would avail a home loan. However some difference between the two kinds of loans exists in terms of tenure, documents, repayment etc.

Interest rate is little costlier for NRI than Indian residents, it is 0.25% to 0.50% more for NRIs. The NRI gets the only 85% cost of the property as a loan amount.

The tenure of loan is also short ranging from 7 years to 15 years. The size of the loan depends upon the borrower's repayment capacity.

Up to 36 times of the gross monthly earnings of the applicant may be issued as loan. However, there is a maximum limit. Calculation of eligibility is same as that of Indians living in the country.

Difference between a normal & NRI Loan  

The re-payment can be made as equated monthly Installments (EMI) through Non - Resident Ordinary (NRO) account or the Non Resident External (NRE) Account.

For security, most banks insist that the first mortgage of the property should be in their name. If the property is under construction then adequate additional security is required such as guarantee of third party (either resident or non-resident).

Tax benefits

NRIs cannot claim tax benefits on home loans in India as they have to pay tax in the nation where they work and earn. However, they need to file tax returns to become eligible for home loans. However, if they pay tax in India for income earned in India, they can claim tax rebate for the home loan. 

The current scenario

An estimated 25 million NRIs living in 130 countries have remitted US$52 billion so far this year (December 2009). In fact India topped the list of countries in remittance flow followed by China and Mexico, according to World Bank report on Migration and Development Brief.

The impact of global slowdown, job losses and unviable job offers has necessitated a section of NRIs to return to Indian shores.

According to housing finance companies and banks disbursing home loans to NRIs/PIOs in Dubai, there has been a sudden surge in demand for residential property across Indian cities and particularly for Tier II cities in the wake of the economic slowdown in the emirate.

Southern cities in particular Bangalore, Chennai and Hyderabad are driving the demand though minimal level demand exists for other cities as well. Most of the NRIs keen to invest in real estate back home are looking for home loans as they are unable to get loans locally due to the current tight liquidity situation across US.

What experts say?

Experts agree that despite turbulence in mature markets, the "emotional appeal" of buying a property in India may be stronger now. However, this in turn has created a price increase in the last six months.

Popular property portals claim that the number of queries from NRIs has surged nearly 15-20 per cent over the last two-three months. However, just how many of these 'queries' translate into actual sales remains to be seen, say people behind the business.

The focus on NRIs for these portals is stronger now as many are looking to come back to India apart from those who wish to invest in properties. Another factor that seems to favour NRIS is the FDI Policy that permits FDI up to 100% from foreign/NRI investor under the automatic route has boosted NRI confidence. Banks have attractive NRI housing schemes to accommodate the housing needs of NRIs.

From the stables of HFCs, NRI housing finance plans with suitable repayment options are available. The easy interest rates on housing finance and the improved lifestyle that developers have created has enabled NRIs to acquire property not only for investment, but also for personal use.

Access to NRI loans - at the door step

The response to the real estate market has been so encouraging from the overseas community that it has prompted housing finance companies (HFCs) to set up branches in countries where there is a high NRI concentration, as in the case of ICICI Bank.

The bank has representative offices in Dubai, New York, Bahrain, Singapore and the UK to tap potential property investors there.

ICICI Bank, Sundaram Home Finance Limited, LIC Housing Finance, HDFC, CanFin Homes, Citibank and a host of other scheduled banks are vying for lending opportunities to NRIs.

However the final decision on whether the time is right to buy a house, whether to use one's own funds or to take a loan, whether to go for an independent house or an apartment, and which home loan provider to use must be made by the NRI himself/herself after careful analysis.

What this means for the realty market

Builders are looking to make up for the huge losses in the past year or so.

With growing NRI interest in Indian properties, reports suggest that the realty prices have rebounded to 2007-2008 levels, which however cannot be good news for people scouting for homes with toned down prices.

This is again an example of how a reaction in one corner of the globe can affect another.

Sometime back the same scenario happened with rentals, which shot up with a lot of NRIs returning home to take up jobs in India.

Source: BankBazaar.com - An online marketplace for your personal loan and home loan needs.