Refinancing your home loan allows you to take advantage of low mortgage rates as well as change the terms of your existing mortgage loan.
Before you decide to refinance your existing mortgage it is important to determine how long it will take you to recoup the expenses of refinancing your home loan. Here are several tips to help you decide if mortgage refinancing is right for you.
Mortgage Refinancing for Dummies
The process of refinancing is simply taking the balance you owe on your existing mortgage and paying it off with a new mortgage. You may have the opportunity to borrow against your home’s existing equity and get cash back in the process. Keep in mind that there are fees that you will be required to pay and there could be a penalty for paying off your existing loan early. You should examine your existing mortgage contract for a prepayment penalty prior to applying for a new mortgage loan.
Closing costs are the fees you will be required to pay when refinancing and you will encounter many of the same fees you paid when you first purchased your home. There are banks boasting about their “no fee, no closing cost” mortgage loans; however, you should know that you are trading a higher mortgage rate which will drive up your payment amount for these closing costs.
What About Mortgage Points?
Paying “discount” points on your new mortgage allows you a way to buy down your mortgage rate. One point is the equivalent of one percent of your mortgage amount paid at closing. Suppose for instance you are required to pay two points on a $150,000 mortgage, this means you will have to fork over $4,500 at closing to get the interest rate promised to you. Should you pay discount points when refinancing? In most cases no. Mortgage rates are at historically low levels and for most homeowners it doesn’t make sense paying for a mortgage rate that another lender would be willing to give you.
Types and Term Length of Mortgage Loans
Refinancing your home loan gives you the opportunity to change the term length and type of mortgage rate for your loan. Mortgage rates come in three basic varieties: fixed, adjustable, and hybrid. Hybrid mortgage loans are a combination of fixed and adjustable rate mortgages and are best suited for homeowners who only plan on keeping their homes for a short while and want to minimize their risk of payment shock from an Adjustable Rate Mortgage.
Refinancing your existing mortgage means choosing the right type of interest rate, term length, and loan originator for the new loan. Most homeowners overlook the importance of choosing the right person to arrange the new loan as this person sets their fee and commission based markup of your mortgage rate. Choosing the right mortgage broker will make or break your new home loan and could save you thousands of dollars every year you keep the loan.
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