Should I Refinance My Home Mortgage?

Do you lack home equity or have credit challenges? If so, you might think that the low refinance rates being offered by today’s best mortgage lender are out of your reach. The good news is that government refinance programs exist that can help you overcome the problems that make refinancing impossible. Here are six good reasons to help you answer the question “should I refinance” and save money on your next home loan.

Should I Refinance My Mortgage Loan?

If you’ve got home equity but have a low credit score you can still take advantage of low refinance rates. You might not qualify for what lenders are advertising, but you can still benefit from mortgage refinancing by lowering your payment amount. The best way to find out if paying for a new home loan is beneficial is by using a simple mortgage calculator.

Have you already started shopping for today’s best refinance rates? If so, enter the interest rates you’ve been quoted here along with your loan balance and desired term length.

Once you’ve determined how much your payment will go down each month from refinancing you can figure out if paying for a new home is worthwhile by approximating your break-even point.

You do this by adding up all of your closing costs including the loan origination fee and dividing by the amount you’re saving each month. This is only an approximation because it doesn’t factor in things like changes in term length or taxes; however, it’s still useful for our purposes.

Dividing your costs by the savings you determined with my simple mortgage calculator tells you the number of months it’s going to take you to break even recouping your out-of-pocket costs. If this time frame is acceptable to you then refinancing probably makes sense.

Stop! Read This Before You Do Anything Else…

If you haven’t started shopping for refinance quotes you’ll need to hold off for a moment. Have you checked your credit reports? If not, your first step needs to be proofreading your credit files for errors.

You can do this for free by vising the government mandated website, AnnualCreditReport.com. Did you find mistakes? If so, each of the credit bureaus has an online process for disputing the error. Once you’ve done this you’ll want to allow enough time from the outcome of the correction to be reflected in your credit score.

Once you’re satisfied that your credit reports are accurate the quickest way to boost your credit score is to pay down the balances on your credit cards below 30% of your limit. Your credit score will take a hit when mortgage lenders run you credit; however, you can minimize the impact by limiting all of your refinance quotes to a 2 week (14 day period).

When you shop for refinance rates this way you’ll only get dinged once for a mortgage lender checking your credit. Some people think they can avoid this hit by refusing to give their Social Security number when requesting mortgage quotes. If you do this you’re relying on someone’s best guess of what your interest rate will be which is almost always a complete waste of time.

Still Not Convinced Refinancing Your Home is the Right Choice?

Here are six of the most common reasons for paying for a new home loan in today’s economy:

1. Lowering Your Mortgage Rate

This is the most common reason for refinancing. With refinance rates below four percent for many homeowners you can lower your payment by hundreds of dollars. If you have credit problems you probably won’t qualify for rates this low; however, using a simple mortgage calculator like the one above will help you decide if your mortgage refinance is worthwhile.

2. Lowering Your Monthly Payments Despite Poor Credit

Bad credit mortgage refinancing can accomplish this in two ways. First, if you qualify for a lower refinance rate your payment will go down. If not, you can still lower your payment by extending the term length of your home loan. This isn’t recommended for everyone as it can make recouping closing costs difficult and slow your rate of building home equity. If you slow building equity in your home you run the risk of being underwater in an economic downturn. Common mortgage term lengths for refinancing include 15, 30, and even 40 years. (again, not recommended)

3. Easing Pressure on Your Budget

Once you qualify for lower refinance rates or a lower payment amount from extending your term length, you’ll get a lower payment. This frees up cash in your monthly budget to pay down other bills, which will help improve your credit score. Reducing debt and using credit responsibly will help you pay less to lenders in all aspects of your finances.

4. Build Equity at a Faster Rate

If your goal is to pay off your mortgage as quickly as possible you can do this by shortening your tem-length. The most common term-length in this case is a 15-year fixed or adjustable rate mortgage. Your payments will be higher in this case than you would get with a 30-year mortgage; however, you’ll pay significantly less in lender finance charges and build equity in your home at an accelerated rate.

5. Lock in Your Payment With a Fixed Rate Mortgage

Are you currently paying on an Adjustable Rate or Interest-Only mortgage? If you’re worried what will happen when your fixed rate period ends or that balloon payment is due there is no better time than the present to refinance with a fixed-rate mortgage.

6. Consolidate Credit Card Debt With Your Mortgage

Again this one isn’t for everyone as treating your home like a bank account has risky and dangerous consequences. Depending on how much home equity you have and how good your credit rating, you may be able to roll all of your credit card and consumer debt into your mortgage balance with cash-out refinancing. Enlisting the help of a good mortgage broker could help you find a lender willing to facilitate the transaction. Remember to use a simple mortgage calculator first to see how increasing your loan balance will affect your payments and your ability (or inability) to recoup your closing costs.

What if You Have an Underwater Mortgage?

Underwater homeowners (meaning you owe more than your home is worth) can benefit from the Home Affordable Refinance Program (HARP 2.0), if you qualify.

The biggest stumbling block when qualifying for HARP is that Fannie Mae or Freddie Mac must back your mortgage AND they must have done so prior to June 1st, 2009. If you meet these qualifications and are current on your payments you could qualify for today’s best refinance rates with a streamline like refinance loan.