Refinancing Mortgage Tips

In the past one year, a lot of homeowners have found out that it is the best time to shop around and see whether refinancing can save them several thousand dollars. Refinancing has lowered down monthly mortgage payments and the 'cash-out refinance' has helped many others settle their credit card bills, remodel their home, buy a new car, etc. But there is another side to the story as well. People who went ahead with refinancing their mortgage without checking all the home refinancing pros and cons are finding that their loan amortization plans are back to square one.

What is Mortgage Refinancing?

Mortgage refinancing is a procedure in which a homeowner takes out a new loan on his real estate in order to consolidate the first loan. In simpler words, refinancing can be thought of taking a new loan in order to close an old one. You must be wondering that how can taking a new loan ensure closing of an old one and instead it can make one amass huge debt. Well, a person who proceeds with refinancing needs to ensure that the new loan has lower interest rates than his original loan. Let us try to illustrate the concept of refinancing with the help of this example. Suppose you have a $250,000 mortgage at a rate 6% for a 30 years term, your monthly payments are $1498. If this rate of interest falls to say, 5.5%, then your monthly payments would be $1420, a savings of $78 per month which will build up to $936 in one year. This way, by taking off a lower interest loan can help you save quite a decent amount of money every year.

Tips for Refinancing Mortgage

Now that you have an idea about what is refinancing, let us check out some mortgage refinancing tips.

• The first thing that you should do before thinking about refinancing your mortgage is to take a look at your credit score. If you have some credit cards that you never use, try to close them and make sure that all the statements clearly state that the accounts were closed on your request and not because of bad debt. Mortgage lenders like borrowers who don't carry a baggage of debts with them. If you have a bad credit score, hold off your plans of refinancing till there is some improvement.
• Try to build up to around 10% of equity in your home so that you do not have to pay upfront for the difference in equity.
• Carefully fact-find the best refinancing mortgage rates so that you have an exact idea about the cost of refinancing mortgage. The interest rates on most of the websites are the best interest rates that money lenders have to offer and the probability of getting these rates are as low as one out of ten. The interest rate of your new loan will depend upon a lot of factors like your credit score, the size of your loan and whether you choose the floating interest rates or 'lock in' the rate.
• If you have a fairly good credit score, chances are that your current lender will try to go an extra mile to keep you as a customer. The various costs associated with appraisals, inspections, etc. may be waived for you so that you do not shop elsewhere. In case you decide to have a look around in the market, take advice on refinancing mortgage from your colleagues or someone who has refinanced his mortgage successfully. Your close friends and colleagues will tell you about the various hidden charges that a broker will deliberately miss on.
• If you are sure that you are going to stay at the current place for a long period of time, you can pay up your points in exchange of a low-interest rate.
• If you have got just a couple of years left in your long-term mortgage, refinancing may not be a wise idea as it will make you end up losing equity that you might have built up.
• Last but not the least, calculate the closing costs as these can eat up a lot of your money. 'No cost refinancing' is not a great idea either as the lender will make sure that he charges you a slightly higher interest rate.

All of us want to pay lower interest rates, build equity, pay off our existing debts, and still have some money left for investing. But the reality is that not all of us would be at a stage where refinancing would take care of all these things. We should carefully weigh all the pros and cons of refinancing mortgages before taking the plunge. I hope this article will be useful in case you are thinking about refinancing your mortgage.