Refinancing Your Home

As interest rates drop, many homeowners consider refinancing. And if you’ve inquired with a few lenders, you’ll probably start getting phone calls and e-mails daily about the proposition of doing so.

There are several reasons people consider refinancing, one of which is to take advantage of lower interest rates to either decrease their monthly mortgage payments, or shorten the terms of their loan.

One of the keys to refinancing is watching interest rate fluctuatations. Securing a low rate is not always easy. Daily bond fluctuations can serve as good indicators of the direction interest rates may be moving. However, since you can never be too sure, you may wish to lock in the lowest rate you see, which you can do more than a month before closing (which is essentially completing the refinancing process). If not, you’ll get locked into a rate five days prior to closing.

Similar to obtaining your first mortgage, you’ll need to reapply to refinance your mortgage. You can save on paperwork, and sometimes on fees, by staying with the same lender you used the first time. Knowing the degree of competition out there, it’s advantageous for your lender to try to give you a good deal. However, there are numerous lenders, and you can shop around, not only for a good rate, but also to save money on fees. The closing process, in which the mortgage ends with one lender and begins with a new lender, typically generates a number of fees that can, and often do, add up. Obtain a list of all potential fees and what they will likely be in advance. Ask for a quote that includes the appropriate fees.

If you’re planning to stay in your home for a number of years, it’s a good idea to take advantage of low interest rates. Just as when you obtained your original mortgage, you can also get points, which means paying off a percentage of your loan amount. If you have extra cash available, this can be helpful. Each point is one percentage of the total amount of your loan. By adding points, you can lower your interest rates.

You can also “cash out” by refinancing for more than the principal due on your original home loan. This is essentially a means of getting some cash as a tax-free loan on the difference between the value of the house now and its value from the initial mortgage. For example, if you have a mortgage balance of $100,000 and your property is now worth $300,000, you could refinance for $175,000 and have $75,000 to keep tax-free, less the transaction costs and fees. According to Freddie Mac, one of the nation’s premiere mortgage secondary lenders, nearly 60 percent of refinancing today is for the purpose of cashing out.