Refinancing your home can lower your monthly payment, reduce your interest rate and consolidate your debt under more favorable terms. To refinance your home, understand the typical costs, solicit offers from lenders and brokers, negotiate the loan and lock in the loan terms.
Act When Rates Are Low
The No. 1 reason to refinance is to get a lower interest rate for your mortgage, notes Bankrate.com. If interest rates were high when you initially secured your mortgage and now rates are much lower, you can lock in a lower interest rate by refinancing.
Refinancing can also save you money if you want to consolidate multiple mortgages. For example, if you have both a mortgage and a home equity loan, you could refinance the two loans into one mortgage at a lower interest rate.
Improve your credit score to get the best interest rate on your refinance.
Pick Your Refinance Term
If you want a lower monthly payment, refinancing into a new, 30-year loan allows you to extend the life of your loan and decrease your monthly payments. This can mean, though, that you'll incur more interest expense over the life of the loan.
Alternatively, you can opt for a 10- or 15-year fixed loan. Your monthly payments will be higher than they would be on 30-year loan at the same interest rate, but you'll pay off the loan quicker and you'll pay less interest overall.
Understand the Costs
Refinances aren't free. Just like with a traditional mortgage, you'll pay closing costs such as:
- Inspection and appraisal fees
- Loan origination fees and points
- Application and survey fees
- Title search and title insurance
- Attorney fees
- Prepayment penalties.
It usually costs around $4,000 to refinance a mortgage, Zillow estimates.
The costs of refinancing often outweigh the financial benefits. Use a refinancing calculator like the one that Zillow offers to check if you'll really save money from a refinance.
Interest rates and refinancing costs vary wildly from lender to lender on any given day. You'll get the best deal on your refinance if you solicit multiple offers for the mortgage and title services. Gregg Busch, vice president at First Savings Mortgage Company, recommends talking with at least three lenders and three title companies before accepting an offer.
There's lots of hidden costs involved in a refinance, so ask the lender or broker to itemize and sum all the costs you'll incur for the loan. The Federal Trade Commission notes that consumers shouldn't be afraid to negotiate the terms of the loan. Let the lender know that you're shopping around and ask if he'd be willing to waive a few fees or adjust the interest rate.
Be wary of so-called no-closing cost refinances. Although upfront refinance fees might be waived, interest rates on these loans are inevitably higher.
Secure Your Loan
If you're happy with a certain loan proposal, ask your lender or broker for a formal document locking in the terms of the loan. Complete the loan process before the lock-in period ends -- it could be two weeks or 30 days --to ensure you'll receive the interest rate and loan fees you agreed on.
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