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Refinancing your mortgage loan: 5 things to know

[Mar 10, 2010.]


Understanding how refinancing works can help you find the best deal on your next mortgage loan. Here are some things to consider before shopping refinance rates and mortgage quotes:

  1. Refinancing can do more than lower mortgage rates and reduce payments: Although these are the primary reasons for refinancing a mortgage loan, it may also be possible to take additional cash for debt consolidation, home improvements, and other needs.

  2. Refinancing requires paying closing costs: It's easy to estimate savings when comparing mortgage rates, but don't forget to factor in closing costs and lender fees.

  3. How long it takes to realize savings on refinancing: This is an important question, and it also relates to your future plans. If you're planning to move within a couple of years, refinancing may not be worthwhile. You can estimate a break-even period by dividing estimated costs by the amount of monthly savings you'll realize by refinancing. For example, if your closing costs are $3,000 and you save $200 a month on refinancing, it will take approximately 15 months to break even on closing costs. When estimating or making calculations involving closing costs, please keep in mind that actual closing costs can vary from initial estimates. Mortgage calculators are helpful, but can only provide general estimates.

  4. Refinancing can eliminate adjustable rate mortgage (ARM) and "exotic" mortgage features: Refinancing to a fixed-rate mortgage (FRM) can stabilize your monthly payments and, depending on the features of your current mortgage, may also help with paying off your mortgage sooner. If your mortgage allows for negative amortization (adding unpaid interest to the mortgage balance), interest-only payments, or is adjustable without "caps" on adjustments, refinancing to a standard fixed-rate mortgage eliminates risks and fluctuating monthly payment amounts.

  5. Current home value and mortgage loan amounts impact refinancing: If your home value has fallen since you bought your home or last refinanced, qualifying for conventional refinancing may be challenging. Although mortgage lenders typically refinance for no more than 80% of your home's current value, you may qualify for refinancing through FHA loan programs. If you currently have an FHA mortgage, the agency's streamline refinance program can provide no-cash-out refinancing with less documentation than traditional refinance mortgages.

Review mortgage quotes carefully and make note of questions and concerns. Mortgage lenders can help find refinancing options meeting your needs and budget.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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