Mortgage Refinancing Tips

Refinancing Tips

Refinancing your mortgage can provide you with a monthly windfall of extra cash, shorten the term of your mortgage and help you build equity faster. However, you need to plan carefully and move properly to get the most of refinancing. Here are some important tips to win the refinancing game.

Define your goals

Do you want to lower your monthly payments? Build equity faster? Get money for a home improvement project or other cause? You need to refine your goal(s) first because each goal will affect the kind of loan and terms you’ll face. There are certain rules and strategies that you must follow to reach the desired goal. Straying from some of these basics can end up not only costing time, but also costing more money in the future.

More Info: Why Refinance?

Check your credit

Even though prevailing interest rates are low, you may not qualify for a rate that is low enough to make a refinance work for you if you have a poor credit record. Check your credit report regularly and maintain your good credit rating. If you have damaged your credit rating, there are ways to fix it. Unless you improve your credit rating, you would have to pay much higher interest for your loan.

More Info: Credit report

Check prepayment penalty

Check if your existing mortgage has a prepayment penalty provision. A mortgage with a prepayment penalty option requires you to pay a penalty or fee if all or most of loan amount is repaid within a certain time period (generally ranging from 2 to 5 years from the start of the loan). From a mortgage lender’s perspective, it helps the lender at least recoup some or all of the significant expense it incurs in putting a new loan on the books. With a prepayment penalty mortgage, refinancing might not be the right option for you.

Run the numbers

Many people jump into refinancing simply because others do. Many others are intimidated by the refinancing process and hesitant to find out how a refinance might benefit them. Often times, people are mislead by so-called ‘rule of thumb’. A refinance should be initiated when it makes sense to you, not based upon what others do or do not. The only way to determine whether refinancing is for you is to actually run the numbers: by analyzing the time and the cost factors.

More Info: Refinance or not?

Look at the total savings

Most people focus on lowering the monthly payment. While refinancing reduces your monthly payment, it often stretches out the term of your loan, which can eventually increase your total interest cost. A far wiser move is to use the lower interest rate to shorten the life of the loan and dramatically reduce the amount of interest paid. Investigate the results of several different loan terms and choose the loan program that will benefit you the most.

Move Fast

Timing is crucial to spell significant savings by refinancing. Mortgage rates sometimes change in the blink of an eye. They drop slowly but rise very quickly. Besides, when you’re ready to make your move, a lot of other people probably are, too. Move fast once you start the refinancing process. There are some strategies to speed up the process.

More Info: Speeding up the Refinancing

Find the way of cutting closing costs

When you refinance, you will incur most of the same closing costs as your original mortgage. Typical closing costs run from 2 to 5 percent of your loan amount. But you may have more flexibility with a refinancing. Check out if you can save on closing costs by:

• Having your lender reuse your appraisal or credit report if they're recent.
  
• Having your lender re-certify some documents (appraisal, title, etc.) for less than the cost of getting new ones.
  
• Asking your lender to pick up the closing costs or include them in your new loan balance (no-cost refinance). Either move, however, will increase the interest cost of your loan.
  
• If you’re refinancing with a new lender and the final closing fees on the HUD-1 are much higher than anticipated, you have three days allowed by law to back out of the deal. Sign the documents but put the lender on notice that you plan to rescind, instead of just walking away from the table. That way, you can get all the money - already paid upfront - back.

More Info: Closing Costs

Pay off other bills

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. 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 amount