Home Mortgage and Refinancing Loans Advertisements Rule One: Do The Math Part II

Did you know that there are two distinct parts to your home mortgage loan, principal and interest? Did you also know that if you don't closely watch both parts you could lose your house? Not to worry though, for home buyers with a fixed rate loan the monitoring of these two parts is done for you. However, for those who got trapped into adjustable rate loans, or low interest starter loans, you better be prepared to watch those two parts very closely. If you are shopping for a loan, be very leery of those sweet looking loans with low monthly payments. Those are the ones you have to watch. In the last article we briefly discussed amortization and negative amortization, and how potentially dangerous negative amortization can be. In this article we will talk about amortization, and do a little math to illustrate what it is. The reason to look closer at this issue is that amortization is what we call the two parts of a loan. This may sound a harsh, but many people lose their homes because of negative amortization.

The definition of amortization really quite simple, however we need to talk about a few other terms to put it into perspective. First is principal, which is the amount of money you owe on your home loan. If you take out a loan for $300,000, that is your principal. Second is balance, which is the amount you owe at any one time on your loan principal. Third is interest, which is the cost you pay for borrowing the money from a bank for your house. Understanding that principal and interest are two different things is a powerful piece of knowledge that is very helpful when shopping for the right home loan.

Okay, let's talk about the two parts. The monthly payment of loan on a mortgage is divided up between the interest due and the principal. So, what happens is, when you make a payment the money goes to the loan servicing company. The servicing company applies portions to both the interest and the balance. This process guarantees that if your thirty year loan is fully amortized, you will pay off your loan, both principal and interest, in thirty years. The system is simple in function, but is complex in calculation.

Here is a quick, and hopefully painless, look at those calculations, just so you have an idea of what people are talking about when the subject comes up. Let's say that John and Joan Jackson take out a loan to purchase their new home. When their loan is funded, or started, the Jacksons make a commitment to pay back that loan on a monthly basis, say $1798.00 a month. As stated above, a certain percentage (the thick math stuff) goes to interest, and the rest goes to the principal balance. As the balance of the principal goes down the percent that goes to interest also goes down, and more goes towards the balance. That is why you hear people say that you pay a lot of interest at the beginning of a loan. Here is an example of how the payment to interest and principal is divided.

The Jacksons have a $300,000 loan and the payments are $1798.00 a month.

The first month they would be paying $1500.00 in interest and $298.00 towards the principal balance. Halfway through the loan, when they owe $150,000, $750.00 will go to interest and $1048.00 will be applied to the principal. With Jackson's last payment, $8.99 will pay off the last of the interest, and 1789.01 will pay off the principal.

Restated, on the Jackson's first payment 83% goes to paying for borrowing the money, and 17% goes to the loan principal. On the last payment .5% goes to paying for the loan interest, and 99.5% goes to the principal. This example is based on a fully amortized loan in which the Jacksons are paying off the principal and the interest at the same time.

The importance of this subject is paramount. If you get into a loan with a low interest rate starter, or an adjustable rate loan, and it is goes into negative amortization, the results could double your payment. We will look at this next time.

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Refinancing a Mortgage - Debt Consolidation Refinancing

Homeowners faced with a substantial amount of debt may decide to refinance their home. Debts that are typically high in interest, for example, credit cards, may be consolidated with lower interest home refinancing. The difference between the two interest rates can be quite significant. There some issues that need to be addressed before deciding to refinance for debt consolidation purposes. They include comparison of interest rates and loan terms, together with the homeowner's present financial circumstances.

This article will explain the definition of debt consolidation, as well as recommend approaches for the topics of loan terms and current financial circumstances.

Debt Consolidation

The description "debt consolidation" may be misleading. Refinancing for debt consolidation does not mean the homeowner is merely combining their debts. A dictionary explanation of consolidate is to "unite, combine, merge". With debt consolidation refinancing, the homeowner in fact takes out a new home loan to pay off all of the outstanding creditors. These creditors can range from automobile dealers to credit card companies. The homeowner's level of debt will remain the same. The homeowner is then responsible for repayment of the new loan.

Once the refinancing is complete and all the creditors have been paid off, the homeowner is now locked into the terms and conditions of the refinancing loan. All terms and conditions associated with credit issued by previous lenders are no longer in effect. As well, interest rates applicable to the refinancing loan will now apply versus the past creditors' interest rates.

Will Refinancing Cost More Long Term?

There are two different aspects to consider before debt consolidation refinancing. Is the end purpose to reduce monthly payments? Or is it to increase interest savings? It is necessary to decide the reason for refinancing as even though a lower interest rate is generally available through home refinancing, this does not guarantee there will be a savings. There are other factors that determine whether refinancing is a beneficial option. The debt amount and length of the loan term also play a part.

Let us examine an example of a homeowner who has a debt which has a term length of five years with an interest rate marginally higher than that of a home loan. The homeowner obtains a refinancing mortgage which has a term life of thirty years. Because the homeowner will be paying the same debt amount over a much greater length of time, there will be no interest savings. There would be, however, reduced monthly payments.

This example brings us back to why it is important to decide the intention for debt consolidation refinancing. Interest savings or monthly payment reductions.

Will Your Financial Circumstances Improve with Refinancing?

It is important to look at the big picture when deciding whether refinancing is the appropriate option. If increased available cash is the object, long-term savings may not be a factor. The Internet has mortgage calculators that can be utilized to determine whether refinancing would result in realizing that objective. Consultation with a refinancing expert is also recommended to come to a definitive answer.

Making use of the information provided in this article will help the homeowner to make an educated decision.

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What Are Home Refinancing Pros and Cons - Can Saving Money Be Good and Bad?

When considering saving money on your mortgage, you must consider the home refinancing pros and cons. Unfortunately, what is a pro for one could be a con for another. This is why you must not just jump on the bandwagon but carefully consider your financial position when thinking about refinancing.

The idea behind refinancing is to get better terms on your loan. A basic definition of refinancing is to get a new loan to pay off another. That's the simple part. All the stuff that goes along with the new loan is what determines whether it is worth it for you to refinance. I will discuss some home refinancing pros and cons and you have to determine whether they are pros or cons for your circumstances.

Lower interest rate.
For most people this is a pro. A lower interest rate means lower monthly payments. A good rule of thumb is to start thinking about refinancing when interest rates are 1 to 2% lower than what you currently have. But the advertised interest rate may not be what you qualify for. Income, payment history, debt load and credit score all combine along with other factors to determine your interest rate.

This can also be a con because a lower interest rate means you are paying less interest throughout the year. This means that you will have less interest to deduct on your taxes. This may reduce your tax refund or cause you to pay more taxes at tax time.

Stretch out term.
This home refinancing pro can also be a con. If you've been in your house for some time and have paid down your loan, your principal could be quite low. When you take that lower amount and stretch it back out over 20 or 30 years, you can reduce your monthly payments quite a bit. But for older people or those who want to stop having home mortgage payments, this defeats the purpose.

There are many other home refinancing pros and cons that can determine whether it's a good idea for you to refinance.
Get In The Know now about refinancing, buying and selling homes, different mortgage types and other real estate information at Real Estate - Get In The Know

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