A home refinance may benefit you if your interest rate is much higher than current market rates. Besides lowering your rate, you may be able to shorten the term of your mortgage, or even get cash out, which may be a great way to pay off debt.
Getting Started and Interest Rates:
To prepare for a home refinance, first get a copy of your credit report. Review the report, correcting errors if necessary. If your credit is bad, you may want to work with a credit repair company, since your credit is the major factor that determines your interest rate. Some other rate determining factors are, the terms of the refinance and the amount of money paid up front. The longer the terms, the higher interest rate you will get, and if you pay more up front you’ll probably pay less in interest. In fact, as a good general rule, the more you pay down the more favorable the terms will be to you. It’s important to consider the refinance cost as a whole package, don’t just focus on lower monthly payments or on lower closing costs or you will probably end up paying much more long term.
Fixed vs. Variable:
Although fixed rates give you the security of knowing what your rate will be, and is generally preferred, there are some situations in which you should consider variable rates. If you do not plan to stay in your home very long, you may benefit from the very low initial rates offered in variable rate home refinances. Variable rates are usually 2-3% lower than their fixed counterparts, and some of these rates offer a fixed rate for a set period which will become variable after that period. Also, the longer the index on an adjustable (variable) rate, the less it will fluctuate with the market. Take all these factors into account when you are looking at refinance deals.
Possible Home Refinance Fees:
Unfortunately, there are many fees associated with refinances, and it is important for you to be aware of these. Some fees you may be facing are: points, closing costs, private mortgage insurance, annual service charges and more. A point is a fee equal to one percent of the loan amount. Closing costs are widely known. There are many refinances available lately that do not require closing costs, but beware of these, you will likely end up paying more than the amount of the closing costs in interest. Private mortgage insurance is required on all home refinances that the loan amount is for greater than 80% of the home’s value. So if you have more than 20% equity in your home, you shouldn’t have to pay this. Sometimes the lender will even include a yearly fee with a refinance, although this fee is usually less than $100.
Closing the deal:
Get everything the lender has promised you for your refinance in writing, including a rate commitment, a closing cost amount, and anything else they have offered you. Look at the cost of your home refinance as a package. Don’t let the lender get you so caught up with your ultra low closing fees that you get stuck with a high interest rate, or you’ll spend much more in the long run.