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If your existing mortgage is overpriced and unproductive, it is time for you to look for its refinance. Yet, before you do so, it is important that you understand some basic concepts about refinance. Generally, borrowers associate refinance with reduced interest rates, reduced repayments and perhaps a shorter loan term. They ignore some equally important questions regarding other payments and fees that impact their overall costs.

The first important consideration is the Annual Percentage Rate or the APR. It represents the actual total cost of borrowing including interest, evaluation fees and legal fees. Each of these charges is vital factor that should determine your choice of the lender. For example, though interest rates are guided by the national financial market, each lender makes his own variations in interest rates to beat his competitors and also cash the need and financial situation of the borrower.

Most banks calculate the interest on annual basis and on the full amount that you borrow and they apply the same interest every year of the loan term. The result is that you pay the same amount of interest in the final year of the loan term that you pay on the first year, even though you have paid off most of your loan by the end of your loan term. As against this there are lenders who work out interest on monthly and even on daily balances. The repayments that you make are reduced from the total refinance loan and this in turn reduces the payment of interest also.

Similarly there is an evaluation fee. The lenders charge this fee to evaluate the cost of your property taking into account the recent sale value of similar property in your area. Evaluation fee is part of the application fee. Some lenders refund the evaluation fee under certain conditions, while others do the job just for free. Legal fees have to be paid to the legal consultants, but some lenders offer to do this work for the borrowers at reduced rates or even free.

Another important question is how much loan you can borrow to refinance your project. This amount is calculated by Loan to Value (LTV). Loan to value is the amount of money borrowed as loan and it is expressed as percentage of the value of the property to be refinanced. For example, if you want to borrow $ 70,000 against $140,000 which is the value of your property, your Loan to Value is 50%. Similarly if your increase your loan amount, the LTV also increases accordingly. Different lenders have different refinancing limits and if you borrow beyond those limits, you have to pay extra charges with certain conditions.
Every borrower knows that there are two principal interest rates, fixed and flexible or variable rates. It is even more important to know how they work and what their features and variations are.

The fixed rate of interest does not necessarily mean that your rate of interest will remain unchanged throughout your loan term. It means that the interest rate may remain fixed from one to five years. Thereafter it may become variable, or in other words, it may be subject to periodic changes as per the policies of the national reserve bank. Alternatively, it may have to be fixed again for a certain agreed period. It is obvious the new interest rates would take into account the prevailing interest rates in the national financial market. The fixed interest rates have numerous limitations and advantages.

The variable interest rates have many features that are dictated primarily by your refinance needs, income, investment, savings and credit situation.

As an educated borrower, you need to study them minutely before committing yourself to any form of refinance.