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Refinance, also called refinancing or refi, is the process by which one loan is replaced by another loan, in most cases with more favorable terms. The new loan is used to pay off the original loan.
In a refinance, an existing loan is paid off early with funds obtained from another loan. Refinancing only refers to loans paid off before their maturity date; if a loan is paid off at maturity, the second loan is simply new financing, not a refinancing. Both individual borrowers and businesses refinance loans, for a variety of reasons.
For homeowners, refinancing a mortgage is a very common strategy. Whenever interest rates fall below the rate at which a homeowner took out their original mortgage, it’s worth examining whether to refinance and save on interest charges. All loans have fees and closing costs, and some have prepayment penalties, so a holder needs to decide whether a lower interest rate outweighs the various additional costs involved with refinancing.
The main reasons for refinancing:
1. To take advantage of a better interest rate
2. To consolidate other debt(s) into one loan
3. To reduce the monthly repayment amount
4. To reduce or alter risk (for example, switching from a variable-rate to a fixed-rate loan)
5. To free up cash
The Role of The Mortgage Broker
The mortgage broker is usually an agent for the purpose of arranging the home loan transaction and generally is the fiduciary of the borrower. This relationship imposes a legal duty on the broker to disclose to you the important facts you need to know about the loan and it means the broker must act in your best financial interest. The broker has a duty of fairness and honesty to both you and the lender. These legal duties can be important in resolving disputes that may arise after the loan is made, but the best way to avoid problems and disputes is to ask questions and be sure you understand the terms of the loan and each of the loan documents before you sign.
When acting as an agent, the broker speaks for you in submitting your loan application to a lender. Make sure that you give the broker full and accurate information and that any loan application or other document the broker prepares for your signature is accurate and complete before you sign it. Never sign blank applications or forms. Make sure you understand the terms of the loan before you agree to it.
Annual Percentage Rate (APR)
The annual percentage rate (APR) of interest includes both the simple interest rate and certain fees, commissions, costs, and expenses. By contrast, the simple interest rate, or note rate, does notinclude these costs and fees. If a broker or lender quotes an interest rate to you, be sure to ask if that rate is the simple rate or the APR. Use the APR to compare loans that have different simple interestrates, points, and other loan charges. The loan with the higher APR may cost you more over the term of the loan.
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