Refinancing Strategies

Refinancing Strategies: How to reshape your mortgage

You can make a number of changes about your mortgage when refinancing. How can you have those changes serve your financial goal(s)? Here are some suggestions of what you can do to make refinancing work for you.

Take advantage of lower interest rates

If you happen to buy a home when interest rates were relatively high, you’d be smart to seriously consider refinancing your mortgage when interest rates drop.

If your present mortgage interest rate is high because you were not qualified for a low rate at the time you applied but now your credit has been improved, you can also get a lower interest rate.

To get a lower interest rate, consider:

• Check prevailing rates and ‘lock in’: You should know what the prevailing rates are. Keep an eye on changing mortgage rates. When you find the best deal you can, lock it in.
  
  
• Check your credit: Even though prevailing rates are low, if you have a poor credit record, you may not able to cut your interest rate enough to make a refinancing work for you. Check your credit report first. If you have any problems with your credit, fix it before you go any further.
  
  
  More Info: How to check your credit report
  
  
• Pay the point: You might want to pay discount points to get an even lower interest rate. Calculate the breakeven point when the one-time up-front cost is fully recouped by your monthly savings. If you are holding the new mortgage long enough to realize the actual benefit, you may want to pay the point(s).
  
  
  More Info: Should you buy the points?
  

Switch from ARM to fixed or vice versa

Homeowners with Adjustable Rate Mortgages (ARM) should consider refinancing to a fixed rate or even another ARM if current rates are favorable.

You might want to consider refinancing from fixed rate to a lower ARM if you're planning to move within a few years.

More Info: Mortgage Programs

Change your mortgage term

You can make a great saving on the interest you pay over the life of the loan by shortening your mortgage term. If you are comfortable with the monthly payment you are making now and willing to forgo small immediate monthly savings to eventually get a huge pot of gold, refinancing from a 30-year to a 15-year or a 20-year can be a good idea.

You can reduce your monthly payment by stretching your mortgage term. If you are having difficulty making your monthly payment, you may want to consider stretching out the term of your mortgage.

More Info: Deciding the Mortgage Term

Adjust the loan amount

Regardless of the amount you borrow, the interest rate you pay on your mortgage will remain the same if:

• The loan amount is less than 80% of the value of your home
• The loan amount does not exceed the current conforming conventional loan limit
  

Regarding your loan amount, you may think of a few scenarios.

• If you need to refinance for more than 80 percent of your home's value, the financial benefits dwindle because you will not be able to get the best rates. Refinancing would not make sense if you’ve already stripped all the equity out of your home.
  
  
• If the remaining balance of your old mortgage is well below your home value, consider taking some money out to pay off other debts such as credit card bills, auto loans and any debt, which costs you interest that is higher and not tax deductible. Fast appreciating home values could also encourage you to refinance for a larger mortgage to pull out equity to consolidate bills or meet other financial needs.