For the past two years, mortgage rates in the United States have been decreasing to record lows. While the housing market is slowly recovering and rates are beginning to rise, it’s not too late to lock in a lower rate by refinancing your mortgage. Refinancing, if done properly, can be an easy way to save hundreds (or even thousands) of dollars a year on the interest you’re paying on your mortgage.
I learned this last year when I refinanced my mortgage. In doing so, I managed to cut $350/month from my payment and save boatloads in interest over the course of the loan. I even managed to work out the numbers so my closing costs would be recouped in less than a year!
If you’re on the fence about refinancing your mortgage, read on to learn more about how you can set yourself up for success and save money for the remainder of your mortgage repayment period…
Know Your Value..and Your Scores
Before you apply for a refinance, there is some important information you need to gather to ensure your chances of approval are as high as possible. Two key pieces in the mix are the Loan to Value (LTV) ratio of your home and your credit score/history. You can quickly calculate your LTV by dividing how much you still owe on the mortgage (including any home equity loans or second mortgages) by the estimated value of your home. Most conventional lenders require this figure to be less than 80%.
For your credit score, obviously the higher it is, the better terms and rates you’ll be offered. If you’ve recently taken out any other large loans (HELOC, car note, etc.), you might want to wait for your score to regulate itself before moving forward with the ReFi application.
When it comes to refinancing, it pays to shop around among various lenders. The easiest place to start is with your current lender if you’re happy with their services as they often will reduce costs in order to keep your business. Even if they offer you a great rate and set of terms, do your due diligence and solicit information from multiple other lenders so you can make the most informed decision for your situation.
Mind the Details
From application fees to another round of closing costs, there’s a lot more that goes into a refinancing than just the interest rate. Make sure your lender provides a Good Faith Estimate (GFE) and don’t be afraid to ask for further clarification and breakdown of every single fee you’ll be charged.
Once you’ve selected a lender and submitted your application, a slew of details will require your attention. These include when your interest rate will be locked, how property taxes and escrow will be handled, and even how interest and current mortgage payments will be handled if you’re closing mid-month.
Keep the Same Timeline
Above all, try your best to keep the same timeline as your original mortgage. If you had a 30-year, fixed rate mortgage that you’re 6 years into, don’t add 6 more years of repayment by taking out another 30-year note. Ask your lender to amortize so that your new mortgage will be set for 24 years. The same thing applies for 15-year mortgages, etc. Remember that even if you’re paying a lower monthly payment, you’ll still be paying that payment for a longer period of time if you allow the clock to reset itself completely from the beginning.
Of course, all this goes out the window if you’d like to take a more aggressive approach and jump from a 30-year to a 15-year mortgage. If you’re going to change the timeline for your loan and can afford a higher monthly payment, shortening your mortgage means debt freedom that much faster!
Have you ever refinanced a mortgage?
This post was written by Jen, a staff writer from The Happy Homeowner
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.