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Tips for How and When to Refinance Your Mortgage

Written By:
September 05, 2013 at 1:25 AM

Successful mortgage refinance can save you tens of thousands of dollars over the lifetime of your home loan. Mortgage refinancing is on e of the most powerful tool home owners have in their financial toolbox. Knowing when to refinance a loan is a can be an overwhelming task. Many people feel that because interest rates are low they should refinance their mortgages.

Whether you want to take advantage of low rates to reduce your payment and you want to complete a refinance application before rates climb higher, you still need to make the right decision. Perform an assessment of your personal finances and circumstances to decide if it makes financial sense to refinance your mortgage at this time.

In some cases, you may find that keeping your existing mortgage will be the best choice. Here are some considerations if you are thinking about refinancing your mortgage. Your response to these factors should guide your decision to refinance your mortgage.

Outline your goals for refinancing

The first task you need to complete before making a decision is determine what it is you want to gain from a refinance. When you refinance your home, instead of paying off the loan, you simply restructure the debt on the property. Typically, you get a lower interest rate and end up with lower monthly payments.

Some other goals homeowners may want to achieve:

  • Reduce interest rate - To reduce interest rate is the most common reason for mortgage refinancing. Homeowners can save money, build up equity faster—all while decreasing the size of their monthly payment. For example, a homeowner with a 30-year, fixed rate mortgage with a 6.0% interest rate on a $200.000 has a principal and interest payment of$1.199.10. That same home loan with a 4.5% reduces the monthly mortgage payment to $1,013.37.
  • Change the term - Complete a mortgage refinance to change the term--like going from a 30-year fixed rate mortgage to a 15-year fixed-rate home loan. Some home owners may refinance and choose a term that coordinates the payoff of their mortgage with their retirement plans.
  • Switch from adjustable-rate mortgage (ARM) to a fixed-rate mortgage - ARM products have a low introductory interest rate. However, when the initial period expires—usually after the first year, rates start to increase at predetermined intervals. Some people prefer to refinance into a fixed-rate product with a lower interest rate that also provides certainty for the future.
    During periods of high interest rates, some home owners. Some people do the opposite in when interest rates are falling or if they don’t intend to stay in the home but a few years.
  • Debt consolidation - Getting out of debt is a common reason for refinancing the home. Homeowners can pull equity out of their homes to pay down high interest rate credit cards, consulate a first and second mortgage and other consumer-related debt. Combining multiple debts payment into a single payment with a fixed-interest rate that is much lower can ease financial burdens and help out the budget.

Getting a lower monthly payment may not always be the goal when you consider other goals like eliminating other debts to lower your total monthly outlay.

Use the Mortgage Refinance calculator to make your own interest rate evaluations and find out which loan is better. Remember, you must plan to stay in the

home for a specific number of years for the refinancing to make financial sense. You need to compare your savings with refinance

After you clarify your goals for refinancing your mortgage, evaluate your timing and other factors affecting your circumstance make it the appropriate time to get a new mortgage.

Check your credit profile

Before you start the refinancing application process, make sure you know what information is contained in your credit report. Some studies estimate that as much as 50% of all credit profiles have errors that can cause mortgage lenders to reject the borrower’s home loan application. At the very least, derogatory information can cause you to pay a higher interest rate.

You’re entitled to receive one free annual report from each of the three main credit bureaus--TransUnion, Experian and Equifax.

Review the information carefully to see if the data is up to date and accurate. If you find outdated or inaccurate information, send a certified letter to the agency informing them of the mistake along with any documentation to support your claim. If you are disputing an account, make sure your credit file contains a note that explains your version of the dispute.

Evaluate the terms of your current mortgage

To determine if a mortgage refinance is right for you. It’s important to know the details of your current mortgage. Information you need to gather include the terms of the loan and the interest rate. Check to see if there is a prepayment penalty if you pay off the mortgage. If so, you will have to add the penalty to the cost of the new loan to make an accurately weigh your options.

Refinancing costs

Expect to spend 3% to 6% of the loan’s principal in refinancing closing costs. This can amount to as much as $12,000 on a $200,000 dollar loan. This cost can include:

  • Loan origination charge
  • Appraisal cost
  • Points
  • Inspection fee
  • Attorney fee

It will take you a few years to recover that cost with the savings from a lower interest rate or a spreading the loan out over a longer term. Before you complete a refinance application, even if you can lower your monthly payment, you still need to look at all the costs of refinancing and prove through your calculations that it’s possible to recoup the costs.

Use the to enter various closing cost amounts to determine how closing costs like origination fee and points affect your loan.

Refinancing existing mortgage once

Most mortgage professionals would advise you to refinance your existing mortgage just one time. Home owners who have completed several refinancing may actually be working to their detriment because of the costs involved in refinancing your home can be a good move if it lowers your monthly payment or helps you build equity in your home quicker.

If you take the time to consider all aspects of refinancing your home mortgage, you will improve your potential for making the best decision based on your financial situation.





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