What you need to know when looking for refinancing

Bring up the subject of “refinancing” and different people would have different tips and opinions to help you determine the right time to refinance your home. You probably have heard from someone that the interest rate on the new loan must be at least two percent less than the old loan or it will not be a good deal. Another “tip” that is thrown about quite often is that if your loan is less than two years old it is not a good time to refinance it yet.

These “sage” advice are, in fact, not entirely correct. It is quite difficult to get an unbiased and accurate advice and information regarding the subject of refinancing – the decision that has to be done to do it as well as the process that surrounds it. Below are some tips, advice and opinions that offer a more objective view of refinancing as given by experts.

Of course, the first question that is usually related to refinancing is when to do it. Put simply, the decision to refinance a home mortgage should be based on whether you would still own the property long enough to recoup the expanses connected with the new loan. Figuring this out is easy as you only need to subtract the proposed new house payment from the existing payment to determine what the monthly savings will be. From here, you divide the monthly savings into the cost of refinancing to determine how many months it will take to recapture that cost.

There are certain situations wherein refinancing should be seriously considered. If you had been able to negotiate a mortgage where you did not pay any closing costs and if the mortgage rate is lower than your existing rate, then refinancing the loan would offer good financial benefits to you. Refinancing will also be a good idea in a situation where the remaining mortgage balance, including points and closing costs, can be refinanced at a reduced monthly payment and still be paid off within your existing mortgage payment term. If you need extra funds for a home equity or auto loan and the mortgage rate is lower than alternative loan rates, then refinancing would also be a good choice. Finally, it is usually seen as a time to refinance your loan when your new mortgage rate is at least one to two points lower than your existing rate and you are planning on staying in your home for at least three to five years.

For every good advice about refinancing there is a counterpart myth about refinancing that is also dispensed to people who need advice on the subject. One popular myth that needs to be debunked is the idea that lowered monthly payments is the basis which will determine wise financing. The truth of the matter is monthly payments are only comparable if they are based on the same loan duration. In fact, you can achieve lower monthly payments even at a higher mortgage rate if the new mortgage has a longer term than the period remaining from the old mortgage.

Another misconception regarding refinancing is that if the rate is not lower by at least two points from your existing mortgage rate, then the refinancing is not worth it. But in many cases, most especially if you have long term plans of staying in your home (about three to five years) even a reduction of just one point can make a big difference in the overall home mortgage cost. Additionally, because of the constant technological advances in the mortgage industry, getting a mortgage loan or refinancing an existing one is much faster and easier now than ever before. If you are getting confused or are apprehensive about whether or not you want to refinance, consulting a mortgage broker can be a good idea. Most of them will consult with you at no cost to you or signifying any commitments.

Having debunked some popular refinancing myths and you want to seriously think about refinancing your mortgage a good tip to making a more informed decision is to consider five factors:

* how much is the reduction in the mortgage interest rate
* how much is the reduction in the monthly payment
* what the prepayment penalties on the old mortgage are, if there are any
* The amount of closing costs, including loan origination fees, application fees, inspection fees, appraisal fees, title insurance, mortgage insurance, points, etc.
* How many years you plan on keeping your home

Think carefully about your answers to these five factors and from there you can determine if refinancing would be the right decision to make.

When you do decide that you want to take the refinancing route, it is good idea to know beforehand what exactly will be involved in the process. When you refinance your mortgage the proceeds from your new mortgage loan will be used to pay off the old mortgage. This is a compulsory step even if you use the same lending institution. This is for the reason that you are signing a new agreement and not just renegotiating the terms of your old mortgage.

Some items will also be returned back to you, namely, the mortgage contract and the old note you signed. The lending institution will also file a Mortgage Record Change. After this you will now sign a new note and mortgage contract. This will now be recorded by the lender. No amount of money is expected to pass through your hands. That is, unless you managed to borrow more than the balance of your old mortgage. You must also pay for points and closing costs, unless you have managed to finance these items as well along with the old mortgage balance.

Appraisals, and maybe even an inspection, will also be done again to your home, so expect it. Your credit history will also be reviewed once again and changes will probably be made in your mortgage and title insurance.