Mortgage Refinancing 101: What You Need to Know
You may have heard the term mortgage refinancing, but you’re unfamiliar with what it is and how the process works. Essentially with mortgage refinancing, you are exchanging your existing, current mortgage with another one. Of course, it is more complicated than just making a quick switch, but the idea is that you receive better terms and usually lower mortgage rates when you refinance. In most cases, refinancing will also help you lower your monthly mortgage payment, giving you the opportunity to save money or spend it in other areas.
Before you decide to refinance your current mortgage, there are several things you will want to take into account. The fist of these is if the new, refinanced mortgage will actually save you money in the long run. Many lenders charge customers closing costs and other fees to refinance, which means in the end, you may not really be saving as much money as you had hoped. Be sure to shop around to different banks and mortgage companies to find out what the different fees are at the time. Pull out your old mortgage documents before applying and find out what your current interest rate and terms (for example, a 15 year or 30 year) are. In most cases, the refinanced interest rate will drop anywhere from .75% to 2% depending on several factors. Once you’ve purchased your home, you may forget about your credit, but having good FICO scores and credit can help to assure you will receive the best deal possible and you will be approved.
Ask different lenders what their lock-in policy is before mortgage refinancing. In most cases, the lock in rate will be effective for 45 days after applying. This guarantees that you will receive the rate you were quoted as long as the refinanced loan closes within that time frame, regardless of whether or not rates increase. Find out if you can pay points, points are required, or if they can be avoided. A point is an amount of money you can pay a lender to decrease your mortgage rate. Some loans require that points be paid while others allow the borrower to choose whether or not they want to pay them as an option. When taking all of the expenses of mortgage refinancing into account, find out which items and fees will be tax deductible. Since the tax laws often change every year, it’s best to consult a tax professional. They can better assist you with determining what tax benefits you’ll receive from the mortgage refinancing. Some people refinance their mortgages several times a year if they find something else available with lower rates, while others just pay the mortgage they have for a long period of time and simply leave things as they are. It’s important to weigh the pros and cons of mortgage refinancing before you go through with the process, and run some numbers so you can determine whether or not this will be the best financial route for you.