It makes sense to refinance your home mortgage loan if the interest rate you currently pay is higher than other offers which are available. The steps involved in refinancing are remarkably similar to those involved in obtaining the original mortgage, without the anxious trepidation of waiting to see if you can secure the loan to buy your home.
The costs involved in refinancing are comparable to those of the original mortgage, so you should calculate how long it will take before the reduced interest rate you can gain will start to show you a saving. Factor in any prepayment penalties which may apply if you close your current loan.
1. Before you start to seek out lenders it pays to check your credit reports and make sure your Fico score is at its best. Your credit score will once again influence which interest rates you will be offered, so ensure it is high before you begin the application process.
2. Refinancing your home loan gives you the opportunity to make basic changes to the mortgage product. You should determine if you want to change the term of the mortgage. If you refinance and reduce the term at the same time then you will be able to pay off the loan in a shorter period, thus saving massively on mortgage interest payments to the lender. You may also choose to extend the term which will decrease your payments even further than the lower interest rate will, but this will mean the debt hangs round longer and will cost far more in interest payments over the long term.
3. You should always comparison shop between lenders and see what different rates are available to you. Make use of online calculators to assess your new monthly payment based on your personal circumstances. Look for reputable lenders and narrow your search down to several potential lenders. You will need to find out a fair estimate of their closing costs and the exact rate they will offer. Once you are armed with the information regarding various rates and lenders you may wish to pre apply.
4. At the same time it makes sense to approach your current lender and advise them you are considering moving your mortgage and negotiate to see if they will reduce your current interest rate without actually refinancing. This could potentially save you thousands of dollars in any prepayment penalties they may apply if you move lenders, as well as the actual costs of refinancing. Obviously they are more likely to consider this strategy if you are a valued customer with a good credit record who always pays on time.
5. If your current lender will not reduce the rate and you need to actually apply to new lenders then ensure that if you are submitting several applications you do so at the same time. This will have the effect of several applications only being counted as one on your credit score, thus not showing up as a negative to reduce your score.
6. Once you have been approved for refinancing then choose the lender which best suits your needs. Always try to negotiate the closing costs down, and if possible pay them upfront rather than have them added to the mortgage. If they are added to the loan then further interest will accrue.
Refinancing to reduce your current interest rate can potentially save you tens of thousands of dollars in wasted mortgage interest payments and generally represents a good decision. However refinancing deals are not a given in the current lending climate and will not be available to all applicants. This emphasises the need to comparison shop several lenders and not just rely on one application.