There are several reasons you may have for refinancing and depending on your goal, you’ll choose a different type of refinance option.
Lower monthly payments - Look for a refinance product with more favorable interest rates and/or a longer term. Make sure that you ask about up-front fees and costs and a potentially higher payment.
One refinance option is a rate and term refinance. This is when you refinance just to change the interest rate and the term of your mortgage. You aren’t pulling out any cash or equity – you are only negotiating a better deal for yourself. Mortgage companies use something called a ‘loan to value’ ratio to calculate your new interest rate. It’s a formula involving how much money you are borrowing and for what length of time. The higher your loan to value (LTV) ratio, the higher the interest rate.
Shorten loan life - if you’d like to pay off your home earlier, switch to a loan with a shorter term, but be sure to calculate the effect of up-front fees and costs.
Obtain funds for a other purchase -
Consider applying for a home equity loan or line of credit to cover your home improvement or other purchase needs. If the interest rate on your existing first mortgage is higher than current rates, shop for a refinance loan that allows cash-out refinancing.
If you haven’t refinanced recently, you should consider it because it could save you a lot of money.Here are some tips to help you to know if you should refinance your home mortgage and how to know that you are getting the best rate.
1.Check if you qualify – Don’t assume you will fail to qualify if you have little equity built up in your home. While many lenders require you have at least 10 percent equity in your home, there are some lenders willing to work with a home owner with only 5 percent equity. You may still qualify and it may still save you a lot of money, but pay attention to costs to be sure. L low equity loans can involve relatively high mortgage insurance costs. You may only qualify if your current loan is owned by Fannie Mae or Freddie Mac. You can find out if your loan is owned by these organizations by calling the company to whom you send your monthly payments.
2. Points or no Points – When it comes to lowering your rates you will need to consider the benefits of having a lower rate vs. paying points up front. A point is typically 1% of the total mortgage loan. In general, higher points may mean a lower interest rate over the life of the loan, and no points may mean lower up-front costs, but slightly higher interest rates over the loan term.
If you’re planning to stay in your home for several more years, you may want to consider paying to lower the interest rate, since you can benefit from lower monthly payments through the term of your mortgage. Plus, the money you pay for points may be tax-deductible over the life of the refinanced mortgage loan.
3. Tricky Interest Formulas – Usually the 0% apr looks good, but balloons in a couple of years causing your monthly budget to break. Unless it fits in with your time frame of being in your home, it’s not usually the best deal.
4. Hidden Fees – If your new mortgage rate seems too good to be true then it probably is. Check for hidden fees in your mortgage that will make up that suspicious difference.
5. Get an Estimate – You have a legal right to a good faith estimate. Get a copy of this document and go over it with a fine tooth comb, it will reveal if there are areas you should ask questions.
6. Timing is Everything – No one can tell the future, but consider carefully how long you plan to stay in your home vs. how much of a savings you will be getting in a refinance. Don’t forget to include all fees and closing costs in your decision.