Many homeowners that decide to refinance their home mortgage find the process confusing and intimidating. No one wants to be taken advantage of when it comes to their finances and the choices can be overwhelming. Here are several tips to help you get off on the right foot when refinancing your mortgage.
Before you start shopping for a new mortgage lender it is important to review your credit records for any mistakes or negative information that could be dragging down your credit score. The mortgage rate you receive when refinancing is largely determined by your credit score, and your credit score is derived from the contents of your credit history.
There are actually three credit histories you need to be concerned with and the records are maintained by three separate companies. The credit reporting agencies responsible for maintaining your records are Trans Union, Experian, and Equifax. These companies have gotten better at sharing information; however, it is still possible to have an error on one credit agency report that isn’t present on the other two. This is why you should request copies of all three credit records and carefully review them for errors.
Recent legislation passed by Congress requires the three credit agencies to provide you a free copy of your credit history every year. You can access these records by registering with the website annualcreditreport.com. This site will try and sell you a credit score when you sign up; however, you do not need to know your credit score when refinancing. If you really want to know what your score is your lender can tell you what it is. Once you’ve reviewed your credit records and are confident they are error free you’ll need to determine which type of loan is best for your needs.
How to Determine Which Type of Mortgage is Right for You
There are two basis types of mortgage loans. You have a choice of refinancing with a fixed interest rate loan or an adjustable rate mortgage. Both choices have advantages and disadvantages depending on your individual circumstances. Mortgages with fixed rate loans have the advantage of predictable payment amounts for the entire duration of your loan regardless of the economy. Adjustable rate mortgages typically come with lower interest rates than their fixed rate counterparts; however, there is always the risk of payment shock when rates go up.
Many homeowners avoid adjustable rate mortgages completely because they’ve heard the loans are dangerous. While it is true adjustable rate mortgages are frequently abused by homeowners who don’t understand the risks, when used correctly they have the potential to save a savvy borrower thousands of dollars. Adjustable rate mortgages work especially well for homeowners that plan on keeping the loan for a short period of time, usually less than five years.
Homeowners in need of short-term financing are able to take advantage of fixed introductory periods offered by many adjustable rate mortgages. Some hybrid adjustable rate mortgages offer fixed rate periods that last as long as five or seven years. If you sell or refinance when before the fixed rate period expires you have eliminated much of the risk associated with adjustable rate mortgage loans. The risk with an adjustable rate mortgage comes from the potential for the borrower to experience payment shock when the lender adjusts your interest rate or recasts the loan. Recasting occurs for homeowners that abuse negative amortization loans with a balance exceeding 110-115% of the original loan amount. Negative amortization refers to a mortgage loan that grows over time rather than one that is gradually paid off.
Now that you’ve checked your credit records for errors and have decided which type of mortgage your need you are ready to begin shopping for a lender. Choosing the right type of lender can make the difference between refinancing with a great loan or an expensive mistake. You can learn more about finding the right lender when refinancing your mortgage and other expensive pitfalls you need to avoid with my free mortgage tutorial. You can register for the free tutorial by clicking the links at the top of this page.