7 Things To Know About Refinancing Your Mortgage

By: Tracy Myers

Over the past year, interest rates on mortgages have been at an all-time low. But now, with our economy slowing recovering, they are starting to climb and are likely to continue to do so into 2013. Because of this, economists agree that now is a great time to refinance your mortgage. Interest rates are still lower than they were a year ago, but are not likely to go any lower. If you’re a homeowner, it’s likely you already have a mortgage; a loan, with your home as collateral, which you are paying back over time. Refinancing allows you to replace that mortgage with a new loan with a lower interest rate and terms that are more financially manageable for you. However, there are a lot of things you need to consider when it comes to refinancing a mortgage. The seven items below will get you started on the subject, and check out the links as well for additional, detailed resources.

  1. Determine why you want to refinance:

    Taking the time to sit down and determine why exactly you want or need to refinance a mortgage will help you find the best deal from lenders. You should determine how much you can afford to pay month-to-month toward your loan, as that will give you a target for a new loan’s interest rate. Ask yourself if you need to lock in a fixed monthly payment or are comfortable with an adjustable-rate mortgage. And are you interested in a “cash-out” refinance, where your mortgage is replaced with a new loan for a higher amount? Refinanced loans can address all or some combination of these needs.

  2. Check your FICO score:

    Once again, it’s time to check your FICO score. This is something you should be doing a couple of times a year and most definitely before you apply for any kind of loan. A high FICO score, 720 or above, will help you secure better rates on a refinanced mortgage. A medium to low FICO score doesn’t mean you won’t be able to get a new loan, but you will most likely have to pay a higher interest rate. If you have been good about paying your current mortgage, that will surely benefit you in your negotiations with potential lenders.

  3. The refinanced mortgage will cost more than what the lender quotes you:

    All this means is that you need to ask a potential lender (we keep saying “potential” because you should visit at least five different lenders when shopping for a refinancing deal) for ALL of the fees involved in a refinanced mortgage. Reliable, consumer-friendly lenders will detail all of the fees you’re required to pay, fees that may include account-keeping fees, service fees, and application fees, to name just a few! You also have options for paying such fees, so be sure to discuss this with your lender as well.

  4. Consider a fixed-rate mortgage:

    Fixed-rate mortgages are overwhelmingly the loan of choice among consumers. With a fixed-rate mortgage, your interest rate may be higher than the initial rate on an adjustable rate loan, but it will remain unchanged despite the ups and downs of the market. This means your loan’s interest rate won’t increase. Talk to your lender about the advantages and disadvantages of both types of loans to see which is best suited for your financial situation.

  5. Home equity:

    Low home equity (home equity being the current market value of your home after subtracting the current mortgage balance) may prevent you from refinancing your mortgage. The burst real estate bubble has negatively impacted the value of many homes across the country. You’ve probably heard of homeowners who owe more on their mortgage than their property is actually worth. To qualify for refinancing, homeowners need a minimum of 3% equity in their home. A good FICO score and a steady income will also help you with refinancing your mortgage.

  6. Look for the best deal:

    As we said earlier, you should visit at least five different lenders when shopping around for a refinanced mortgage. Begin with the lender in charge of your current mortgage, but don’t stop there. Keep in mind, not all lenders will be forthcoming with information about fees and other crucial details you need to make an intelligent decision about your money. If you don’t have great credit, you may find that some lenders will turn you down, but don’t let that discourage you from continuing your search for a deal, as there may be a reputable lender willing to work with you.

  7. Be patient:

    Wall Street’s federally mandated gambling spree, along with the popping of the real estate bubble, resulted in an unprecedented amount of downsizing (i.e. firings) in the lending industry. At the same time, there’s been a huge increase in the number of loan applications, which means, for the foreseeable future, you’ll need to be patient as you wait to see whether or not your loan has been approved. Currently, a 30-day wait period is not uncommon.

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