How To Plan For A Successful Home Loan Mortgage Refinance

How To Plan For A Successful Home Loan Mortgage Refinance

Why should you refinance your home loan?
Won’t getting a new mortgage cost you more instead of less?
How can you save money on your home loan and avoid getting further into debt?

Most activities that are worth your time require time, effort and lots of planning. That works for weddings, having a baby, finding a new job and of course refinancing your home loan or mortgage. The consequences of not planning well when dealing with important activities are obvious. Your wedding can flop, you may not be able to afford what your baby needs, not make the interview selection and more to the point lose money on your home loan or mortgage.

The good news.
The good news for home refinancing is that interest rates have rarely if ever been so good for refinancing. Interest rates are now firmly below the 5% level even on the most conservative interest rates models. If you arranged your mortgage recently or your interest rates were not very competitive you could be in for some surprising savings.

The bad news.
The interest rates may be at record lows but it has never been so difficult to get your home loan or mortgage credit approved. Home loan and mortgage providers have been burnt too often with borrowers who can’t pay or won’t pay their debts and are making sure you are the real deal.

Getting even with Inflation

Getting even with Inflation

Let us get to briefly know the terms- Saver,Borrower and Investor.

Saver, like many of us, saves now to consume at a later date, when he may not have an income to meet his various needs. Hence, he saves for the rainy day.

Borrower, on the other hand, spends more than his means allow at a given point of time. He hopes that he will earn enough in future, when he will not only repay his creditor(s) but will also have enough money left to spend on food and other necessities.

Investor is the person with a glint in his eyes. He invests in a business that is essential to us all. He hopes to sell his products year after year. Of course, we figured out that he is the one who takes the big bets.

Interestingly, all of us keep switching roles from Saver to Borrower or even Investor.

We have made another discovery - the 'purchasing power of money' declines with time, thanks to the monster called Inflation.

Interestingly, Inflation bares its fangs only at Saver. It is a saviour of Borrower and a boon to Investor.

We have also learnt an important lesson: Investing is a good way to offset Inflation.

After understanding all this, we stopped ourselves to ask if it is worth saving.

We realised that something was missing from the picture.

And then, a bolt from the blue told us that it is 'Interest' that completes the big picture.

Question hour again
So, what is Interest? Why do we need it? How does it tilt the balance in favour of Saver?

Let’s get to the Answer
Let us first assume you have $500 to spare. You have two options as to what to do with it - you can either buy a shirt today or you can save the money and buy a shirt six months later, during Diwali. Mind you, the same shirt will cost you $550 by Diwali time. So, what do you do?

You are obviously muttering: "what a stupid question!" After all, it will make a whole lot of sense to buy the shirt now as your $500 will not be able to fetch you the same shirt six months down the line. And why save anyway?

Hold your horses while we add another twist to the options that you have.
Assume a friend of yours needs $500 urgently. He is willing to return $550 six months hence. What will you do then?

Well, if he is a very good friend you will give him the money and postpone your plan to buy a shirt. After all, you can buy the shirt once your friend returns your money.

Another twist: what if your friend promises to repay $600 (instead of $550) six months down the line?

You will lend him that $500 without any second thoughts, as you will not only be able to buy the shirt six months down the line, but also have $50 to spare.

Lessons:
1. It does not make sense to save if you have not been compensated for Inflation.
2. In order to boost your saving instinct, you need to be compensated at least for the loss of your purchasing power. That is you need to be compensated for Inflation.
In our examples, we have seen that a borrower is willing to repay a higher sum in order to compensate the lender for the loss of his purchasing power.

Some very basic arithmetic now
In the first example, you lend your friend $500 but he returns $550 six months later. That is your friend gives you $50 extra when he returns your money. In the second case, he returns $100 extra. The money that you lent him is called 'Principal'. The extra money that your friend gives is called 'Interest'.

'Interest' defined the textbook style
"Interest is the price paid for money lent by one person for the use of others." In other words, Interest is in no way different from wages that are paid as a price for the use of labour.

What is Interest Rate then?
Interest paid on principal expressed as a percentage of the principal. Hence, in our second poser, Interest Rate was 10% ($50 interest on a $500 principal). While Interest Rate in the other example was 20%.

Now we know what Interest Rate is.

The battle lines have been drawn
Interest Rate aids Saver by compensating for the ravages caused by Inflation. On the other hand, Borrower has to think twice before borrowing since he needs to pay a price.

What about Investor?

Investor now starts having second thoughts too.

He uses money to set up a business. Last time, we discovered how uncertain investing can be, as many things can go wrong with the business. However, the expected rewards (profit) offset the risk (uncertainty) and hence, Investor goes ahead.

However, now he has the option of earning Interest on his money if lends it to Borrower. Which is why he needs to make at least as much profit as he would have earned as Interest if he had given the money to Borrower.

The cycle is complete now.

When Inflation rises, Borrower and Investor have a distinct advantage.

Borrower rushes to borrow more to spend now while Investor smells higher profit from its business. Saver knows that he is at the receiving end and insists on higher Interest Rate, reestablishing the balance.

Pack up time
We have learnt how Interest swings the balance of power back in Saver's favour. Interest induces saving.

Adjustable Rate Mortgage ARM

Adjustable Rate Mortgage ARM

Adjustable Rate Mortgages in general have a lower interest rate than fixed rate loans. The lower rate means lower mortgage expense, but the lower rate does have its possible drawbacks.

The interest rate can change at the adjustment period. Subsequently, so will your monthly mortgage expense, but I wish I had a nickel for every fuzzy report that claimed there would be widespread loan defaults because of Adjustable Rate Mortgages. That obviously has not come to pass, but there is a comfort zone in fixing your monthly mortgage expenses with a fixed rate loan, even if those expenses are higher that they might be with an ARM mortgage.

Home Mortgage Refinancing Guidelines

Home Mortgage Refinancing Guidelines

Here's a quick checklist of home mortgage refinacing guidelines you can use to quickly estimate the possibilty of lowering
your monthly mortgage payment
lowering the overall interest payments over the life of the mortgage or paying off your mortgage sooner. We've also included a handy home mortgage refinance calculator at the bottom of this page were you can

How long do you plan on staying at your current address?
If you don't plan on staying in your current residence for at least 5 years, then it will be pretty hard to recover your costs unless the mortgage refinance gives you a 2-3 percent drop from your current rate.

How long before the savings break even with the costs?
With home prices up Nationwide, it's not uncommon to carry a $250,000 30 year mortgage for middle income homeowners. A refinance for $250,000 with a 1 point drop in the interest rate will save about $2040 a year.

If your closing costs come in around 10K, you could recover your costs in about 5 years. Don't forget that although points paid are part of your closing costs, you'll get a tax benefit on a percentage of the points paid as an interest expense. Remember to figure in that savings when you calculate your recovery period.

What Does Debt Consolidation Mean

What Does Debt Consolidation Mean?

The act of combining several loans or liabilities into one loan. Debt consolidation involves taking out a new loan to pay off a number of other debts. Most people who consolidate their debt usually do it to attain a lower interest rate, or the simplicity of a single loan.

Also known as a "consolidation loan".

This is common among companies or people with credit problems (maxed-out credit cards, car loans, student loans, etc.), who combine all of their debts into one loan to create greater ease in repayment. In the case of credit card debt, this can often be advantageous because credit cards generally carry a high interest rate.

Adjustable Rate Mortgage ARM

Adjustable Rate Mortgage ARM

Adjustable Rate Mortgages in general have a lower interest rate than fixed rate loans. The lower rate means lower mortgage expense, but the lower rate does have its possible drawbacks.

The interest rate can change at the adjustment period. Subsequently, so will your monthly mortgage expense, but I wish I had a nickel for every fuzzy report that claimed there would be widespread loan defaults because of Adjustable Rate Mortgages. That obviously has not come to pass, but there is a comfort zone in fixing your monthly mortgage expenses with a fixed rate loan, even if those expenses are higher that they might be with an ARM mortgage.

Home Mortgage Refinancing Guidelines

Home Mortgage Refinancing Guidelines

Here's a quick checklist of home mortgage refinacing guidelines you can use to quickly estimate the possibilty of lowering
your monthly mortgage payment
lowering the overall interest payments over the life of the mortgage or paying off your mortgage sooner. We've also included a handy home mortgage refinance calculator at the bottom of this page were you can

How long do you plan on staying at your current address?
If you don't plan on staying in your current residence for at least 5 years, then it will be pretty hard to recover your costs unless the mortgage refinance gives you a 2-3 percent drop from your current rate.

How long before the savings break even with the costs?
With home prices up Nationwide, it's not uncommon to carry a $250,000 30 year mortgage for middle income homeowners. A refinance for $250,000 with a 1 point drop in the interest rate will save about $2040 a year.

If your closing costs come in around 10K, you could recover your costs in about 5 years. Don't forget that although points paid are part of your closing costs, you'll get a tax benefit on a percentage of the points paid as an interest expense. Remember to figure in that savings when you calculate your recovery period.

What Does Debt Consolidation Mean

What Does Debt Consolidation Mean?

The act of combining several loans or liabilities into one loan. Debt consolidation involves taking out a new loan to pay off a number of other debts. Most people who consolidate their debt usually do it to attain a lower interest rate, or the simplicity of a single loan.

Also known as a "consolidation loan".

This is common among companies or people with credit problems (maxed-out credit cards, car loans, student loans, etc.), who combine all of their debts into one loan to create greater ease in repayment. In the case of credit card debt, this can often be advantageous because credit cards generally carry a high interest rate.

AUTO LOAN FAQ

Why is a credit profile important ?

To the financier your credit profile is the most important factor he will consider before funding you. Your credit profile tells him if you are able to and intend to pay back the loan to him.

What are the specific components of my credit profile ?

The components are age, profession or occupation, income and financials, previous credit history and your home, ie, if you live in a rented accommodation or in your own home.

What can I do if my credit profile does not match the financier's requirements ?

If your credit profile does not match the financier's requirement you can strengthen it by bringing in a co-applicant or guarantor who would be able to match the requirement.

How to improve your credit profile ?

If you are salaried and over 60 years of age it is unlikely that you will be financed based only on your profile, most financiers would insist that you bring an additional guarantor or co-applicant whose age is less than 60. It would be better for you to take one of your immediate relatives (son, husband, wife, daughter ) as co-applicant. The age limit for self employed is 65 years.

If you are self employed and your income is between Rs. 45,000 p.a. and Rs. 60,000 p.a., it is unlikely that you will be financed based only on your profile. Most financiers would insist that you bring an additional guarantor or co-applicant whose income added with yours is greater than Rs. 60,000 p.a. It would be better for you to take one of your immediate relatives (son, husband, wife, daughter ) as co-applicant. If you are salaried the minimum income is normally Rs. 100,000 p.a.

If you have been in employment for less than 1 year and total number of years in service is less than 3 years it is unlikely that you will be financed based only on your profile. Most financiers would insist that you bring an additional guarantor or co- applicant whose years in service match the requirement. It would be better for you to take one of your immediate relatives (son, husband, wife, daughter ) as co-applicant. If you are salaried the minimum income is normally Rs. 100,000 p.a.

How much finance are you eligible for ?

The quantum of finance you can get depends on your income, your ability to repay and the financier's LTV norms for the car.

What documents do I need to establish proof of income ?

For income, most financiers look at your IT returns for the last two years. Financiers also look at the nature of income. Some of them do not consider speculative income (especially from the stock market), rental or agricultural income. Some financiers discount such income by up to 50% in their workings.

What are the pre-conditions on the amount I earn and its relation to the amount of finance I can usually get ?

Generally, if you have an income of Rs. 60,000 p.a. not including speculative / non- recurring income, most financiers would fund you 80 % - 90 % of the value of a small car. Similarly, if you have an income of Rs 100,000 p.a., again, not including speculative / non-recurring income, most financiers would fund you 75 % - 85 % of a premium car.

Do loans previously taken play a role in determining the amount of finance I can get now ?

Yes they do. Fixed obligations such as an earlier loan or certain deductions in the case of salaried people are normally removed from the income by most financiers before determining the finance amount.

What are Negative Areas and Negative Credit Profiles ?

Most financiers have an internal list of geographical areas and professions / business/ companies that are created based on their previous credit experience. Loans for customers from such areas or with such profiles may be rejected or may be more closely scrutinised before approval.

Can I get car finance without submission of income documents ?

Yes, you can, under the No Income Proof scheme offered by some financiers.

Can I get finance for accessories ?

Most financiers do not finance accessories other than those which are factory fitted like air-conditioners. Some may fund music systems and such other expensive accessories.

Can I get finance for Insurance and Registration ?

Most financiers do not fund insurance and registration. The LTV is worked out on the ex-showroom price of the car and does not include insurance and registration charges.

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Interest Rate

What is the difference between a Flat interest rate and a Reducing Balance interest rate ?

Take a simple example. Suppose you have taken a loan of Rs. 5 Lakh at 10% interest. You repay Rs. 25,000 in the first instalment. If the 10% interest continues to be applicable on Rs. 5 lakh after your first repayment, you are paying a "Flat Interest Rate". But, if 10% interest is applicable now on Rs 4.75 Lakh, you are paying a "Reduced Balance Interest Rate".

What is a 0% interest scheme ?

In this scheme you are not charged any interest. You only pay back the principal amount. However, be careful to check out the hidden costs under such schemes. There are some disadvantages in this scheme - the amounts financed are low and the tenure is short.

Why is the interest rate higher for a used car ?

A used car carries a higher Asset Risk than a new car. Therefore, interest rates on used car rates are higher.

Is it better to go to my current financier ?

Yes, if you have a very good repayment record for an earlier transaction, you are most likely to get a lower lending rate. Even your loan processing could be faster. However, do check out some competitive offers before taking a final decision.

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Repayments

What is a default ?

Repeated prolonged delays and dishonoured cheques are deemed to be defaults in repaying your loan. Most financiers would expect you to turn in the asset on request, failing which they may seize your car, after serving you proper notice.

What happens if my cheque bounces ?

Dishonouring a cheque is a criminal offence. Legal proceedings may be initiated against you. Your credit profile could be seriously damaged.

What happens if I delay some instalments ?

You are advised not to delay your instalments because frequent delays may affect your credit profile and might make further borrowing difficult and costly. However, under rare circumstances, if you delay an instalment, most financiers would charge you a delayed payment charge, which could be as high as 3 %, compounded monthly. This could be twice the rate at which you borrowed.

Can I get a temporary relief from paying my instalments ?

Yes, in some cases you can, if you inform your financier in advance. This should only be for a few days and you will have to pay delayed payment charges.

Can I Pre-close or Pre-pay a loan ?

Yes, you can, but conditions apply. Please refer the section on Pre-Closure.

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Insurance

What happens if the car meets with an accident ?

In the event of an accident you will have to inform your insurance company /agent. They will send an assessor to assess the damage to the car. The insurance company will process your claim and pay it directly to the financier, unless you have taken an NOC from the financier, in which case the payment will be made by the insurance company in your favour. The financier will normally give an NOC if you are regular in your payments. In case of a complete loss, the financier would receive the payment directly from the insurance company.

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General

What is an Exchange Scheme ?

Some dealers may offer you an exchange scheme whereby your existing car can be upgraded to a new one. The dealer will purchase your car at a price depending on the model, year and the condition of the car. The value of your old car is then adjusted against the purchase price of the new car. You could also get the balance amount financed.

Can I sell the car during the tenure of the finance contract ?

No, you cannot sell the car unless you repay the loan. An NOC is required from the financier before you can sell the car.

What happens when the loan is fully paid off ?

After the loan has been fully paid off, the financier will issue Form 35 with a covering letter (NOC) to the RTO for cancelling their name from the R/C book. A similar NOC will be issued to the insurance company requesting for the deletion of their name from the policy.

What is De-Dupe ?

Most financiers have compiled a list of defaulters, their own, as well as from other available sources. Details of all clients are run through this list to check if the same client had applied for a loan and if yes, the file is rejected.