Ads in newspapers, magazines, on TV and radio are urging us to check out mortgage refinancing. But why should you refinance your mortgage when you worked so hard to get it?
Mortgage Refinancing Benefits
- Lower interest rate. As interest rates remain low, mortgage refinancing could get you a lower interest rate and a smaller monthly payment. If you have an adjustable rate mortgage, now would be a good time to refinance to a fixed rate mortgage before interest rates rise.
- Cash. Because home prices have increased, you could cash in on your higher property value and get cash for education, vacation, or credit card and other debt payoff. You could even shorten the length of your mortgage.
Apply for Pre-Qualification or Pre-ApprovalYou can apply to any lender that has a pre-qualifying program for free either in person, on the phone, by mail, fax or online. The lender will review the information you provide: paystubs, tax returns, and bank statements; the lender will also check your credit report and get a house appraisal. Then they will give you an estimate of how much your new mortgage payment would be at the terms you want.
Pre-approval is a more formal commitment from the lender saying that if all your information checks out, you will get a new mortgage from that lender. Itís up to you whether you accept or not.
- Carefully check the rates, terms and conditions on the refinanced mortgage contract before you sign to be sure that you are improving your situation.
- Avoid private mortgage insurance. Instead, get a life insurance policy for the amount of your mortgage is usually, which is usually a better value.
- Avoid refinancing for longer periods, like refinancing for another 30 years when youíve already paid for 10. You'd end up paying more in interest in the long run.
Refinance Mortgage Loan-to-Value Ratio (LTV)The home loan-to-value ratio is very important to the lender in determining how much you can borrow. It is computed by taking your homeís assessed value and multiplying it by a percentage figure, usually around 80%. From the resulting amount, the lender will deduct your outstanding debt to determine your maximum loan.
Cost of RefinancingThe costs of refinancing a mortgage are similar to those of the mortgage. There are fees to pay for the paperwork of the loan, fees for home inspections and deed search, other miscellaneous costs and points. Important term: a point is equal to 1% of, in this case, your new mortgage amount. Points are included in your closing costs, what you must pay when you actually sign legal contracts with the lender and seller to make the house yours. Usually the lower the interest rate, the more points will be required. You can find a 0-point mortgage, but make sure it doesn't come with a higher interest rate that will wipe out all the savings.
How Do You Improve the Rate on Your Mortgage?The major reason for refinancing your mortgage is to get a more favorable, that is lower, interest rate. You can get an even lower interest rate if you follow these guidelines:
- Make sure you have equity in your home. Equity is the difference between what your house is worth and what you still owe. In addition to increasing your LTV, it makes you a more attractive credit risk.
- Maintain a positive credit history. A good bill payer makes a more comfortable credit risk.
- Keep a sensible relationship between income and debt levels. If youíre spending close to or more than what you make, sooner or later, you look like a bad credit risk so your rates will be higher.
When Is the Best Time to Refinance?A good time to refinance is when all the following are true:
- The rates are substantially lower than what you now have (2% or more).
- You plan on remaining in your home for more than 2 or 3 years after refinancing.
- You have equity in your home.
- Your personal credit history is in good order.
- Youíre sure that refinancing will help your financial situation, even taking into consideration the cost associated with refinancing.