BEFORE we look into the mortgage refinance market in the state of Connecticut, let's first understand what the term means. Mortgage refinance is just another mortgage loan.
The term 'refinance' is used to indicate that the property being mortgaged to the refinance loan lender is already mortgaged to the same or another lender who had financed the original mortgage.
The mortgage refinance loan frees the property from mortgage to the original mortgagee and places it under mortgage to the lender of the refinance loan.
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Thus, the mortgagee changes (or that too may not change if the lender of the purchase mortgage loan is the same as the lender of the refinance mortgage loan), while the customer continues to live in the mortgaged house and pays back the refinance loan in monthly installments.
Types of mortgage refinance in Connecticut
Since the financial market in the United States is regulated by Federal Reserve, the basics of the mortgage market in Connecticut are the same as in the other states. Let's therefore look at the types of mortgage refinance most popular in Connecticut.
The most popular mortgage refinance loan in Connecticut is the Adjustable Rate Mortgage (ARM) loan. These are loans that come at low interest rates for a pre-defined number of initial years followed by changing rates every year thereafter through the life of the loan.
ARM loans are expressed as, say 3/1 ARM. This means that the loan will carry a fixed interest rate for the first three years and then will be changed every year thereafter depending on certain variables. Similarly, a 5/1 ARM would mean that the fixed rate would apply for the first five months and would be changed each year thereafter.
Most customers in Connecticut chose the 15-year or 30-year ARM loans because they enable low payments initially and higher payments in course of time as the borrower's income increases.
The other type of mortgage refinance popular in Connecticut is the Fixed Rate Mortgage (FRM) loan. These loans carry a fixed interest rate throughout the life of the loan irrespective of how rates move in the market. The most popular FRM loan is the 30-year FRM though 15, 30, 40, and 50-year FRMs are also available in the state.
The important point to note is that interest rate is higher in case of long-duration loans. Thus a 30-year loan, whether ARM or FRM, will carry a higher interest rate than a 15-year loan, and so on.
Need for caution
Many mortgagees not only in Connecticut but in the other states too presume that a lower interest rate spells lower costs of refinance. This is usually not the case though. Interest rate is just one item of cost.
When you terminate your original mortgage account and take a mortgage refinance loan, you have to meet with many upfront costs such as penalty for prepayment of your original mortgage, property valuation fees, broker commission, and points among others.
If 'points' has confused you, please know that is expresses the amount of money you may have to give the lender as a lump sum in order to reduce the effective annualized cost of your refinance loan.
The formula is: 1 point = 1% of the amount of loan you are seeking. Some lenders insist on a certain number of points to be paid by the borrower; others don't. So, when you negotiate with lenders or brokers, make sure to ask them if points are a must -- and, if yes, how many.
Note that, in mortgage refinance loans, points need not be paid upfront: they can be deducted over the life of the refinance loan (this is one difference between refinance mortgage and purchase mortgage -- in the latter, you have to pay all the points upfront in one go).
So, interest rate alone is no indicator of the cost of your refinance loan. The market has evolved a term called 'APR' (annual percentage rate) that takes into account the total cost on a annual basis of your loan. APR is therefore the rate you must be conscious of more than the interest rate.
While you must talk to mortgage lenders or brokers for your refinance loan, it would be a good idea to first use online calculators on the websites of such firms. These calculators ask you to provide data pertaining to your property as well as your credit profile, and on the type of loan you want.
Once all required details are fed into the online calculator, you get approximate ideas on what you can expect from the market. With this information on the back of your mind, you can confidently negotiate with lenders or brokers in your part of Connecticut.
There are many websites where you will find online calculators, three of which are: www.mortgageloan.com, www.interest.com, www.erate.com, www.bankrate.com.
These are also the websites where you can access directories of lenders / brokers in your city. Do also use online tax calculators which will show you how much tax you can save (note that the interest you pay on your mortgage, the points, property taxes are all tax-deductible).
The most popular duration of mortgage refinance loans in Connecticut is 15 years, whether ARM or FRM. However, loans of higher or lower durations are also available. Don't be swayed by low interest rates alone. Instead, go by the APR since it takes into account all costs you have to incur, both upfront and through the life of the loan.
Use online calculators to get preliminary ideas about what you can expect in the market and to build your knowledge-base to leverage your negotiating power with mortgage lenders or brokers.