Choosing a Lender
Choosing a lender is a very important part of the process
of re-financing a home. Understanding the different re-financing
options and knowing how each of these options work is very
important but none of this matters at all if the homeowner
is unable to find a lender who is willing to offer them
the rates and terms they are seeking. Choosing a lender
can be a long and difficult process but there are some ways
to make it easier. One simple way to make it easier is to
ask for advice from friends or family members who recently
re-financed. Additionally, homeowners can do their own research
to determine which lenders are able to offer them the best
rate. Finally the homeowner should determine whether or
not the finances should be the governing factor in choosing
a lender. Surprisingly enough, in most cases it is not.
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Ask for Advice from Friends and Family Members
Friends and family members who recently refinanced can
be a homeowner’s most valuable resource in the
process of selecting a lender. These friends and family
members are so valuable because they will most likely
be willing to offer you a quite candid opinion of the
lender they used. This opinion may be either positive
or negative but in either case it is useful to the homeowner.
If the opinion is negative the homeowner can remove this
lender from their list of lenders to consider. Conversely
if the lender comes highly recommended, the homeowner
may consider this lender more carefully.
Comparison Shop-credit
Homeowners who want to know which lender is offering
them the best interest rate and financial terms should
do a great deal of comparison shopping. The homeowner
may even consider requesting quotes from each and every
lender. This should make it perfectly clear which lenders
are willing to offer the homeowner more favorable rates.
When comparing these quotes all of the factors should
be considered to ensure the quotes are being compared
fairly. For example each quote should be broken down
to determine the monthly savings, total savings, etc.
All of this statistical data will make it much easier
for the homeowner to make a wise decision when the time
comes.
Consider More than Finances-budget
Finally, while interest rates, loan terms and other
financial matters are all certainly important none of
these are more important than being treated fairly by
the lender. For this reason, the homeowner should carefully
consider all of their lenders and should determine whether
or not they feel as though the lender is responsive to
his needs. For example, a lender who does not return
calls in a timely fashion or answer questions truthfully
and accurately may not be the ideal lender for a homeowner
even if he is the lender who is offering the most favorable
rates.
Additionally, homeowners should trust their instincts
regarding their trust in the lender. Some lenders simply
do not appear to know what they are talking about. Homeowners
might be inclined to avoid these individuals because
they may end up doing more harm than good during the
re-financing process. Conversely some homeowners may
be immediately impressed by the honesty and intelligence
of another lender. In most cases, the homeowner would
likely choose the second lender as long as the rates
offered by each lender were comparable.
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Choosing a Fixed or ARM Option
One of the most important decisions a homeowner will have
to make when deciding to re-finance their home is whether
they want to refinance with a fixed mortgage, an adjustable
rate mortgage (ARM) or a hybrid loan which combines the
two options. The names are pretty much self explanatory
but basically a fixed rate mortgage is a mortgage where
the interest rate remains constant and an ARM is a mortgage
where the interest rate varies. The amount the interest
rate varies is usually tied to an index such as the prime
index. Additionally there are usually clauses which prevent
the interest rate from rising or dropping dramatically
during a specific period of time. This safety clause provides
protection for both the homeowner and the lender.
Advantages of a Fixed Option-emergency
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A fixed re-financing option is ideal for homeowners with
good credit who are able to lock in a favorable interest
rate. For these homeowners the interest rate they are able
to retain makes it worthwhile for the homeowner to re-finance
at the new interest rate. The major advantage to this type
of re-financing options is stability. Homeowners who re-finance
with a fixed mortgage rate do not have to be concerned
about how their payments may vary during the course of
the loan period.
Disadvantages of a Fixed Option
Although the ability to lock in a favorable interest rate
is an advantage it can also be considered a disadvantage.
This is because homeowners who re-finance to obtain a favorable
interest rate will not be able to take advantage of subsequent
interest rate drops unless they re-finance again in the
future. This will result in the homeowner incurring additional
closing costs when they re-finance again.
Advantages of an ARM Option
An ARM re-finance option is favorable in situations where
the interest rate is expected to drop in the near future.
Homeowners who are skilled at predicting trends in the
economy and interest rates may consider re-financing with
an ARM if they expect the rates to drop during the course
of the loan period. However, interest rates are tied to
a number of different factors and may rise unexpectedly
at any time despite the predictions by industry experts.
A homeowner who can predict the future would be able to
determine whether or not an ARM is the best re-financing
option. However, since this is not possible homeowners
have to either rely on their instincts and hope for the
best or select a less risky option such as a fixed interest
rate.
Disadvantages of an ARM Option
The most obvious disadvantage to an ARM re-financing option
is that the interest rate may rise significantly and unexpectedly.
In these situations the homeowner may suddenly find themselves
paying significantly more each month to compensate for
the higher interest rates. While this is a disadvantage,
there are some elements of protection for both the homeowner
and the lender. This often comes in the form of a clause
in the terms of the contract which prevents the interest
rate from being raised or lowered by a certain percentage
over a specific period of time.
Consider a Hybrid Re-Financing Option
Homeowners who are undecided and find certain aspects
of fixed rate mortgages as well as certain aspects of ARMs
to be appealing might consider a hybrid re-financing option.
A hybrid loans is one which combines both fixed interest
rates and adjustable interest rates. This is often done
by offering a fixed interest rate for an introductory period
and then converting the mortgage to an ARM. In this option,
lenders typically offer introductory interest rates which
are extremely enticing to encourage homeowners to choose
this option. A hybrid loan may also work in the opposite
way by offering an ARM for a certain amount of time and
then converting the mortgage to a fixed rate mortgage.
This version can be quite risky as the homeowner may find
the interest rates at the conclusion of the introductory
period are not favorable to the homeowner.
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