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The Basics of Mortgage Refinancing

Just as obtaining a mortgage for the initial purchase of a home is a labor intensive process that requires good consumer skills, securing a refinance home loan for your existing mortgage requires care, knowledge, and patience.

It’s true that you can save money with a refinance, but this isn’t a guarantee.  Your refinance loan can turn into an expensive headache if you rush into it and don’t take the time to identify and pursue the best options.  Our guide covers the basic steps in the process.

You don’t need to be a financial expert, but your knowledge needs to be thorough enough that you understand not only the various loan products but also the process itself and the long term effects your refinance decision will have. The three primary parameters to consider when refinancing are the length of the loan, the interest rate and the fees involved.

The Length of the Loan

The first decision you need to make with respect to your refinance is the length of the new loan you need to find.  While a 15 year fixed rate mortgage costs less in interest over the life of the loan than a 30 year mortgage, it does come with higher monthly payments.  Conversely, a 30 year mortgage will cost you more in interest, but your payment amount will be less each month.

Adjustable rate mortgages,or ARMs, come with even lower interest rates but are mostly used in situations where the borrower does not intend to stay in the home more than a few years.  These loan types are available with 30 year or 15 year term lengths.  Determine what you can afford to pay each month and let this amount dictate the length of the refinance loan you take on.

The Interest Rate

The interest rate determines how much the loan will cost you over the length of time that it is in effect.  The higher the interest rate, the more the loan costs.  The lower the interest, the less money you are spending over the lifetime of the loan.

If you refinance your home solely for an advantageous interest rate, you may not actually see the profit of your actions unless you stay in your home for a long period of time.  In some cases, the breakeven point at which the cost of the refinance and the savings associated with the lower interest rate coincide may be years in the future.  Make sure you plan to remain in your home at least five years if you’re refinancing to take advantage of an interest rate.

The Fees

Often overlooked, the fees associated with a mortgage refinance can wreak havoc on any savings you hope to realize.  Some lenders charge numerous ancillary fees that literally nickel and dime you to the point of breaking even years later.  Other lenders commit to charging much lower flat fees, allowing you to recoup your costs years sooner.

The fees are always disclosed ahead of time.  Carefully reading through the good faith estimate (GFE) provided by your lender can save you a lot of money before you even begin the refinance process.

Shop around for the lowest mortgage rates and fees offered by lenders in your area.  Spend a bit of extra time to comparing the various loan products available to you and choose wisely with respect to the loan type, the fees, and the interest rate you are willing to accept.

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