How does a mortgage refinancing work?

A home loan is a long term commitment. For most people, signing on the dotted line is a 30-year contract. In this amount of time, many things can change. Many people will outgrow their home and sell their house. Sometimes, people also outgrow their mortgage. In this instance, mortgage refinancing can be useful.

Benefits of a Mortgage Refinance

There are many reasons why people decide to refinance their home. As you pay off your home loan, the principle of your loan reduces while the value of your property increases. The difference between these two figures is known as equity. When you refinance your home, the bank may give you a home equity loan. You can use this money to improve or enlarge your home, pay for tuition, or even take a holiday.

Sometimes, as a home loan decreases, home owners decide to refinance in order to lower their monthly repayments. This is a good option if you are struggling with difficult financial times or are just looking to free up cash flow for other projects.

Refinancing your home also gives you a chance to renegotiate your loan terms with your bank or lender. This means that you may be able to achieve a lower interest rate and also lessen the fees and charges which are attached to your home loan.

The Refinancing Process

When you refinance your loan, you can stay with your current lender or shop around for a new one. The refinancing process is similar to the one when you originally bought your house and applied for a mortgage, although sticking with the same lender will require less paperwork.

The bank or lender will most likely go ahead with the usual checks, such as employment and identity checks. They will also require a valuation of your home, which they will arrange. Once this has all been finalized, your old mortgage will be discharged and your new loan will come into effect.

There are usually some fees attached to a refinance loan. These can include a loan establishment fee, a valuation fee, and the possibility of ongoing fees. There is a chance that there may be a fee from your lender for the early discharge of your loan.

Home Loan Research

Finding out as much mortgage information as possible before you sign up for any loan is a good idea. Being aware of not only the interest rate, but the fees and charges attached to the loan product, is essential. Reading the small print now can save a lot of heartache later.

 
Credits to Paul Dabb for this article.

The Economist came up with what they call the Big Mac Index to compare Big Mac prices all over the world. The Big Mac is sold in over 120 countries and the idea is based on purchasing power parity or PPP. You don’t have to be a Wall Street professional to know what the concept behind PPP is. Basically, what the Big Mac Index is trying to tell us is that a Big Mac should roughly cost the same from one country to another. A lone U.S. or Canadian dollar should buy the same amount of goods and services in all countries. That means we can use the Big Mac index to gauge expectation on future exchange rates between two countries as in the long run, prices tend to converge to minimize arbitrage.

The Big Mac Index and Purchase Power Parity (PPP)

The Big Mac Index can be used as an informal analytic tool to compare if a currency is over- or undervalued just based on Big Mac PPP. In essence really, a basket of goods and services is generally used to compare year over year inflation for a particular country, or to compare purchasing power between identical basket of goods and services in different countries. In the case of the Big Mac Index, it’s the Big Mac as the one and only item in the basket. Interesting concept and a very basic one that everyone should understand from their Economics 101. This is economics simplified. It’s Burgernomics.

I’m getting me some McDonald’s tonight.