Navigating the Tricky World of Mortgage Refinancing Part 1
written by Credit-HQ ExpertThe mortgage marketplace has been a messy place lately. Because the economy is in such terrible shape, interest rates have plummeted. That means that many people, maybe even you, could jump in right now and get an great rate on their mortgage which means more of your payment goes to buy back your home from the mortgage company.
When you set up your original mortgage, part of all that legal mumbo jumbo was a clause that gave you the right to end the current mortgage and pay it all back if you want which is what you do when you refinance with another lender. If there was any stipulation that you would pay a prepayment penalty in that original loan, that’s different but that kind of stipulation is rare. But be aware of any prepayment penalty you agree to is put there for the good of the lender. If the loan officer can get you to agree to one, they make a bigger commission.
The great thing about most mortgage contracts is you have the right to pay them off early but the lender cannot suddenly call for full payment of the loan and end the mortgage. It is really unfortunate how many myths fly around about how to refinance a loan and how little is really understood. The outcome is few people use refinancing in a smart way or at least not as smart as they could and they miss many of the benefits.
Know Your Loan.
Before you even make the first phone call about refinancing your loan, make sure you know all about your current loan. Many people don’t even know the basics such as the interest rate they are paying on the loan they have now. It only stands to reason that you have to have at least a basic understanding of the loan arrangements you have now to decide if the new loan offer is a good one or not. So bite the bullet and pull your original mortgage finance papers out of storage and sit down with a cup of coffee and read them.
As you are reviewing the loan you are currently paying on, think through if this refinancing plan fits your financial goals and where it fits in your financial situation over all. Things like your age, how much you make, how strong your asset picture is and what you want to achieve financially short and long term all must be factored in so the mortgage refinancing step you are considering fits perfectly with who you are financially and where you want to go with your money.
What’s In It for You!
Don’t be like too many mortgage holders and let potential refinancing partners intimidate you. It’s a good idea to keep your eye on the prize which is how refinancing your mortgage can be a good thing for your family finances. You do need to understand the costs but put the costs of the refinance into perspective of the long term pay back of refinancing your loan. This is called a “cost benefit analysis” and it is an important part of any business decision.
A good rule of thumb is to evaluate the savings you will harvest when you refinance. Understand that on an annual basis. Then get a solid estimate of the costs of the refinancing. Now do the math on how long this step will pay for itself. If that payback is within a time frame you can live with, refinancing is a good idea for you.
Counting the Costs
There is an illustration in, of all places, the Bible that talks about how nobody who wants to build a tower would do so without knowing the costs. So before you even consider signing any papers, you should know what refinancing your home loan is going to cost you. There are a lot of online calculators that can help you do the comparison of the savings to the average costs of a mortgage refinancing deal to let you know if it is a good idea for you to consider the deal right now.
Generally the costs of a mortgage refinancing process are pretty cut and dried. You will pay points which amounts of about one percent of the amount you are refinancing. There will be an appraisal of your home which costs about $350 and the cost for the lender to get your credit report which is in the ball park of $20. Costs you will pay at the time of closing are lender costs, closing costs and insurance for the title. Those costs together will probably come in at around $1500.
Now there are some refinancing “deals” being advertised that say you can get your loan refinanced for no costs. But you and I both know that those costs don’t go away and that lender is going to find a way to get them paid by you. Many of these deals have a provision for the interest rate you pay to shoot up after you are stuck in the loan and that adjustment more than pays the lender back for eating the costs up front. You are far better off to just pay the costs when they are incurred and lock in that interest rate.
Click here to see Part 2: Navigating the Tricky World of Mortgage Refinancing Part 2
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