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The Basics of Refinancing Your Home Mortgage

Thursday, May 13th

The Basics of Refinancing Your Home Mortgage

Your home is your largest, most valuable financial asset. It can take years to pay off the mortgage on that asset. To reduce your monthly payment or the amount of interest you pay over the long run, you may want to consider refinancing that loan. Home loan interest rates are at record levels so this is a great time to look into refinancing your mortgage.

When refinancing, you essentially pay off your existing mortgage and create a new one. Since you are creating a new loan when you refinance, you get a new loan with new terms. There's a variety of mortgage terms you can negotiate. These include interest rates, duration of the loan and the amount of the loan.

Interest rates: Many people choose to refinance their mortgages when interest rates have dropped significantly to make it financially beneficial to refinance the mortgage. By refinancing at a lower interest rate, you can lower your monthly mortgage payments.

Another term which can be negotiated on your home loan is the term or duration of the loan. If you previously had a 10-year loan, it's possible to get a new mortgage with a 30-year duration. This is a good option if you're consolidating debt into the new mortgage amount. Beware that on a mortgage with a shorter duration that you may be paying a higher monthly mortgage rate. Contrarily, a longer term mortgage will most likely have a lower monthly payment.

Finally, you may also be able to negotiate the amount of the loan. If your home has held its value or increased in value, you can roll another loan or other debt into your home mortgage amount. That way, you pay off both loans with one low monthly payment. With interest rates as low as they are, this is a very desirable strategy. Credit card debts, car and student loans are debt items that can be rolled into a new mortgage.

Also, don't forget to shop interest rates before starting the paperwork. Banks vary on their interest rates, closing costs and fees. Some banks are actually raising these rates and costs in an effort to increase their profits and hold down the amount of loans they are processing. Go online and research rates among lenders. Not only can you look for the best deal, but you can use this information to negotiate lowers costs.

Be careful not to get addicted to refinancing. Some people refinance every time interest rates take a dip. While it may seem like you are saving money, you are also racking up closing costs every time you create a new loan. Over the long run, refinancing multiple times may actually cost you money.

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Mortgage Refinance Company FAQ

When you refinance your mortgage, you essentially take out a new loan on your current home. Your new lender pays off your balance with your previous lender, and you start a new mortgage. It sounds complicated, but the average homeowner refinances their mortgage every four years!
A refinance could be a great opportunity under several conditions. These include a significant reduction in your interest rate, minimizing risk by changing from an adjustable rate mortgage (ARM) to a fixed rate loan, or reducing the length of your mortgage (e.g from a 30-year fixed to a 15-year fixed).
There are three situations where it probably doesn't make sense to refinance. If you've had your current mortgage for a long time, most of your payments are now going towards the principal instead of interest; a refinance will put you back to paying more towards interest and cost you more money. Or, if your current mortgage has a prepayment penalty and the lender isn't willing to waive it, you could spend more in fees than you'll save by refinancing. Finally, if you're planning to move in the near future, you might not recoup the closing costs you'll pay to refinance before it comes time to sell your home.
A cash-out refinance lets you borrow against the equity you have built up in your home. Some people do a cash-out refinance to consolidate debts at a lower interest rate, to pay for college, or to remodel their home.
Absolutely. There are some highly-rated lenders whose primary focus is online home loans, both first mortgages and refinancing. Because these lenders often have less overhead than a local mortgage broker or bank, you may get lower interest rates and be able to negotiate on some of the fees to get the best possible terms.
You'll want to run the numbers to see if it makes sense for you. Will you be in the home long enough to recoup what you've paid in points to spend less on interest? Will it make a big enough difference in your monthly payments? Do you have the cash on hand or will you have to roll the cost of the points into the mortgage itself? The decision is ultimately yours, but do the math to see if it's a good option first.
Remember all of the paperwork it took when you got your current mortgage? Expect a refinance to be very similar. You'll have to provide proof of income and homeowner's insurance coverage, bank statements, and so forth. Your home will probably need a new appraisal, and you might have to dig up your documents from the first closing, like the property survey. The process will involve a hard pull on your credit, so don't be alarmed if you see your score dip temporarily.
That depends on how quickly you provide the required documentation, how fast your lender processes it, and several other factors. You can expect an estimated time to close ranging from 30-60 days.
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