Refinancing your home is a great way to take advantage of lower interest rates.
But are you getting the best deal?
These 10 tips for refinancing will help you get the best deal on your loan.
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1. Identify Your Objective
Refinancing your mortgage isn’t always about getting a lower payment or interest rate. Some people look to refinance to get cash using their home equity to pay off debt, or fund home improvements. Clearly identifying the main objective you wish to attain by refinancing is an important step in the process.
Reasons to Refinance Your Home
- Reduce your monthly mortgage payment
- Lower the interest rate
- Get rid of mortgage insurance
- Get cash using your home equity
- Refinance an adjustable-rate mortgage into a fixed-rate
- Change the loan term, 15 year, 10 year, etc.
2. Check Your Credit Report for Errors
Before you start applying you should get a copy of your credit report to make sure there are no errors. You can get a free copy of your report once per year at www.annualcreditreport.com. Go through your report line by line to make sure everything listed is accurate.
3. Improve Your Credit Score
Your credit score determines what kind of rate you receive. But it can also determine how much closing costs are. The higher your FICO score the lower risk you present so lenders can offer you better loan terms.
The most common and quickest way to increase your credit score is by paying down your credit card debt. Your credit utilization ratio is the amount of available credit you are using. Try to get your card balances to under 15% of their credit limit.
4. Compare Loan Offers with Multiple Lenders
You can refinance your home using pretty much any lender you wish. While refinancing with your current lender may seem like the quickest and easiest way to refinance your home, you might not be getting the best deal.
Lenders will give you a loan estimate before starting the refinance process. The loan estimate will clearly outline the various closing costs, lender fees, and interest rate of the loan.
Fees and rates will vary lender to lender. It’s recommended you get loan offers from at least 3 or 4 different mortgage companies before committing to a lender.
5. Negotiate Closing Costs
Closing costs are lender fees for preparing and issuing the loan. On average these fees can run between 2%-5% of the loan amount. You should make sure that you are still saving money after factoring in closing costs.
These fees are not set in stone. Getting multiple loan estimates will help you to negotiate closing costs with lenders.
6. Look Closely at No Closing Cost Refinance Offers
You have probably heard of a no-cost refinance loan offered by some mortgage companies. Don’t be fooled by the way these refinance loans are structured. Mortgage lenders do not lend money for free.
There fees are just made by offering a higher rate so they can make the money when they sell your loan. Always compare no cost refinance offers with a traditional refinance offer to see if you really are getting a deal or not.
7. Know the Different Types of Refinance Loans
There are several types of refinance programs available today. Knowing which one is best for your situation can help you reach your refinance goals.
Cash-Out Refinance – A cash-out refinance is when a borrower gets a new loan to pay off the old one plus get additional cash back using the equity in your home as collateral. You are left with one mortgage and payment for the loan
Home Equity Loan – Home equity loans and lines of credit (HELOC) are similar to cash-out refinancing except instead of refinancing your current loan, you’re getting a new loan using your home equity. Also known as a second mortgage.
Streamline Refinance – If you have a Government backed mortgage such as a VA or FHA loan you may qualify for a streamline refinance. As the name suggest it is a refinance streamlined to make it quicker and requiring less documentation that traditional financing.
8. Refinance an Underwater Mortgage with HARP
The home affordable refinance program was created in 2010 by the Obama Administration to help homeowners that are underwater on their mortgage. HARP allows borrowers to refinance their home regardless of the loan-to-value ratio on their loan.
9. Remove PMI by Refinancing into a Conventional Loan
If you have an FHA loan mortgage insurance is most likely required for the life of the loan. However, you can remove PMI if the LTV ratio on your mortgage is under 80%. Private mortgage insurance (PMI) is not required on conventional loans with a LTV ratio below 80%.
Removing PMI from your mortgage loan by refinancing your FHA loan into a conventional loan your an save you thousands of dollars per year.
10. Refinance into a Fixed-Rate Mortgage
If you have an adjustable-rate mortgage then at some point your interest rate will increase and your monthly payment will go up. To avoid this you should refinance into a fixed-rate mortgage to lock in a low interest rate for the life of the loan.
11. Get a Low Refinance Rate with a 15 Year Loan
If you’re looking to pay off your mortgage early refinancing into a shorter loan term is a good idea. 15 year refinance rates are lower than 30 year rates which can save you tens of thousands of dollars in interest.
However, your mortgage payment will be higher with a 15 year loan term. Be sure you will be able to afford the new higher mortgage payments.
12. Buy Discount Points
Discount points are pre-paid interest you can buy that will lower your interest rate. Each discount point costs 1% of the loan amount and will lower your interest rate by 0.25%.
As an example: Let’s say you have a $200,000 home loan with a 4% interest rate and you want to lower your rate by 0.5 percent. You would need to purchase 2 discount points at $2,000 each.