Top 4 Reasons to Refinance Your Home Loan

Refinancing your existing loan involves taking a new loan to pay off the earlier debt. The terms and conditions of refinancing vary for one state to another. Two major refinancing options are- rate and term refinancing and cash out refinancing. When looking for a  lender to refinance your home loan, use home loan calculators in Texas to compare home loan rates offered by them. Let’s take a quick look at the top four reasons why you must  consider refinancing your existing home loan.

1.Helps Save Money

Refinancing into a loan with lower interest rate lowers the interest payment obligations, which is a significant advantage, especially for homeowners with long-term loan. Many lenders also provide attractive discounts on closing costs to borrowers with a healthy credit score. To arrive at informed decisions, homeowners must use home loan calculators that will help them determine the cost of refinancing.

2. Helps Unlock Your Home’s Equity

Refinancing helps unlock your property’s equity as you can get a new loan on the basis of your home’s value and the payments you have made on the mortgage. You can use the loan amount in different ways such as financing home renovations, and paying for your kids university costs. The rate of interest will be the same as that for the mortgage.

3. Enables you to Shorten Your Loan Term

Refinancing your existing loan into a shorter one can be a prudent option, if your payment capacity has increased (due to an inheritance, or an increase in salary) as compared to when you took the loan. Refinancing into a shorter loan will help save on interest payments and other costs and can be the best choice if your loan does not allow you to pay more on your mortgage. To realize substantial savings, choose a provider with lower closing costs.

4. Other Benefits  

You can club your existing debts together into a single loan and refinance into a new loan to save on interest costs. Consolidating debts  helps keep a track of all your payments, which is important for better finance management. If you expect rates to rise in future, refinance your variable loan into a fixed loan that can help save costs. You can also refinance to pay off existing debts on time, which is a must to maintain a healthy credit score.

Conclusion

Refinancing your existing loan comes with a number of benefits that can help you manage your debt better. Before you refinance, use a home loan calculator to calculate the amount you would save. Refinancing costs can be substantial and it may take years for you to recover them. Therefore, refinance only if you intend to stay in the house for a long period.

Are You Paying Too much For Your Mortgage?

An amortization schedule, though one of the most important documents in a mortgage process, is still the most overlooked. Rarely do home loan or mortgage applicants take the time to speak with their bankers or their loan advisors to understand what an amortization schedule is and how it helps.

The word ‘Amortization’ is an accounting term that refers to the amount of principal and interest paid during the loan term.  The amortization schedule gives information about the number of installments paid, the breakup of the principal and interest paid, the principal paid and the balance outstanding. 

The Example

In order to understand this better let us take up an example.

Suppose you took a home where

Loan Amount - $10,00,000

Interest Rate – 12%

Term Period – 1 Year

And let’s say the banker tells you that this is how you are supposed to repay your loan

Number of Installments – 12

Monthly Installment - $88,849

The banker also gives you an amortization schedule that would look like this. 

The Amortization Schedule

No of Installments Paid	Installment Paid (A+B)	Principal Paid (A)	Interest Paid (B)	Principal Outstanding	% Principal Outstanding
1	$88,849	$78,849	$10,000	$9,21,151	7.88%
2	$88,849	$79,637	$9,212	$8,41,514	15.85%
3	$88,849	$80,434	$8,415	$7,61,080	23.89%
4	$88,849	$81,238	$7,611	$6,79,842	32.02%
5	$88,849	$82,050	$6,798	$5,97,792	40.22%
6	$88,849	$82,871	$5,978	$5,14,921	48.51%
7	$88,849	$83,700	$5,149	$4,31,221	56.88%
8	$88,849	$84,537	$4,312	$3,46,685	65.33%
9	$88,849	$85,382	$3,467	$2,61,303	73.87%
10	$88,849	$86,236	$2,613	$1,75,067	82.49%
11	$88,849	$87,098	$1,751	$87,969	91.20%
12	$88,849	$87,969	$880	$0	100

Understanding the Amortization Schedule 

After looking at this self-explanatory amortization schedule a question that might come up in your mind is that how is the Principal Paid(A) and the Interest(B) calculated.

To calculate the Interest we need to apply the following formula

Interest = (Principal*Rate*Time)/100

Principal = Principal Outstanding after paying last one’s installment

Rate = 12% (on an yearly basis)

Time = 1 month = 1/12 year

You will see that the rate and time will remain the same whereas the principal will change month on month 

1^st Installment

Interest = 10,00,000*12*(1/12)/100 = 10,000

Principal Paid = = $88,849 - $10,000 = $78,849

Principal Outstanding = $10,00,000 - $78,849 = $9,21,151

*Remember: This month’s outstanding principal will be next month’s principal

2^nd Installment

Interest = $9,21,151*12*(1/12)/100 = $9211.51

**For the sake of simplicity let us round it off and now the Interest is $9212

Principal Paid = Installment Paid – Interest Paid = $88,849 - $9212 = $79637

Principal Outstanding = $9,21,151 - $79637 = $841514

This is how you would go on calculating the interest paid for each month and also the principal outstanding.

At the end of 12 months you would see that Principal outstanding becomes 0 and you may then add up all the interest amounts paid to get the exact value of the total interest paid.

In this case the total interest paid comes out to $66,186

Word of advice

Whenever you take a mortgage loan do ask the lender to provide you the amortization schedule. This will not only tell you the exact interest amount you are paying on your loan but it would also help you to know the exact principal outstanding at any point in time during the loan period, in case you are planning to pre-close your loan.