Mortgage Refinance Tips
Most people consider the mortgage refinance process for one simple reason: to obtain more favorable mortgage terms. If you’re thinking about refinancing your mortgage, here are a few things to know about the process.
Know your options
Start by taking time to understand the different mortgage refinance programs currently available. If you can afford to, consider refinancing into a shorter term fixed rate mortgage. Choosing a 15- rather than a 30-year refinance product likely will result in higher monthly payments. However, the shorter term can save you from paying thousands of dollars in interest. Just understand that paying less interest affects your income tax returns because there won’t be as much interest to deduct.
Do you currently have an adjustable rate mortgage and feel uncomfortable with the amount by which interest rates may increase? If so, this is another situation in which refinancing into a fixed rate mortgage may make sense. As an alternative, you could refinance into an ARM offering caps on the number of times and the amount by which interest rates adjust throughout the loan term.
Once you have decided on a mortgage refinance program and a lender, another issue to consider is locking in the negotiated terms. As with the original mortgage process, the mortgage refinance process can take many weeks to complete. Rather than allow the possibility that your interest rate and number of points will “float” during this period, you may be able to obtain from your lender a binding commitment known as a rate lock or lock in.
If interest rates decrease and you have locked in a higher rate, you won’t be entitled to the lower rates. To protect yourself against this, try negotiating with the lender for a modified lock in agreement that will allow you to take advantage of any lower rates during the lock in period. If your lender won’t agree to lock in your rates, definitely consider working with a different lender that will.
Also be aware that a lock in is for a certain period of time. If you don’t complete the mortgage refinance process within that time frame, your rate lock will expire. When interest rates are falling, lots of homeowners decide to refinance and the rush may cause delays in processing your application. Always stay in regular contact with the lender and provide any needed information in a timely manner.
Know the costs
The mortgage refinance process involves closing costs similar to what you paid when you applied for the original home loan. Fees for refinancing, points, and settlement costs can all add up so, as before, know what they are and make sure you can cover them. Also be aware that in some states, you may be charged a penalty for early repayment of the original loan.
Most lenders charge you additional points in exchange for lower interest rates. A point is equivalent to 1% of the total amount you’re refinancing. If you refinance $150,000 at one point, the cost of that point is $1,500. Two points doubles that cost. Some lenders offer zero points, but again, the interest rate they’re charging in return will likely be higher. Zero points lowers your closing costs, but the higher interest rate likely will increase the amount of your monthly payments.