Mortgage refinancing replaces your existing mortgage loan with a brand new mortgage and new terms. If, after doing the proper research, you have decided that mortgage refinancing makes sense for your situation, here’s how you can get it done.
First, you will need to find out what the current interest rate is, and compare that to the rate you are paying now. If the interest rate being offered is lower than your mortgage rate by 1% or more, now may be a good time for mortgage refinancing.
Of course, it’s important to remember that interest rates don’t tell the whole story. While considering mortgage refinancing, you should also pay attention to the APR (annual percentage rate) that is being charged. APR takes into account the interest as well as the additional fees that the mortgage servicer has bundled into the loan.
Because mortgage refinancing basically means you are getting a new loan, it will come with expenses that are characteristic for opening a loan (such as processing fees and closing costs). Some of these fees may be charged up-front, and others may be rolled into your mortgage rate. If using a mortgage broker, make sure you know what they’re charging and where those charges will appear. Be aware that in some cases, a broker may be compensated by a mortgage lender for giving you a loan with higher interest rates. [See related article “Predatory Tactics That Mortgage Lenders Use”]
You should keep in mind that the overall price of mortgage refinancing ― when lender fees and closing costs are taken into account ― may be so high that you don’t “break even” until several years after you refinance. Therefore, mortgage refinancing is usually only recommended if you plan on staying in the home for some time.
The type of mortgage refinancing plan that you choose should depend on your financial needs, not whatever program is being promoted on TV. If your financial situation (e.g., credit score or debt level) has improved since your original home loan was established, you may have several options for mortgage refinancing.
Many homeowners refinance so they can take advantage of low interest rates ― just make sure you do the math to determine if the new rate is low enough to make mortgage refinancing worthwhile. Some borrowers decide to refinance because they want a shorter loan term. Negotiating a 30-year mortgage down to a 10- or 15-year mortgage might raise your interest rate (and monthly payments) a bit, but you will repay the loan faster and thus save money on interest overall. Conversely, you may choose to extend the length of your mortgage loan so that your monthly payments are lower and more affordable.
Borrowers with a balloon mortgage will remit small monthly payments during an initial period (3 to 7 years) after which they must repay the loan in full ― a balloon payment ― or participate in mortgage refinancing. Those who choose to refinance their loans can avoid the balloon payment by converting to a fixed mortgage based on their outstanding balance.