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Home Refinance Options Compared

If you want to refinance your home, take some time to learn how to do it right.  The following list of "bests" and "worsts" will help you determine when and how to refinance your home to increase savings.

The Best Time to Refinance

The best time to refinance is during an economic downturn.  Interest rates are at rock bottom and banks are desperate to close some deals.  Lenders are willing to work with you because there's no one else to work with.  You can get loans with amazing terms.  Look for the lowest mortgage rates available and go for it.

The Worst Time to Refinance

The worst time to refinance is when you're making loads of money at your job, your home value is appreciating through the roof, and new banks are opening up all over the nation.  These signs are all indicative that the market is inflated.  A refinance will land you with an interest rate that is artificially high.

The Best Loan Type

The best loan type is something fixed at a low rate.  A short, fixed rate loan is a good loan to have, if you can afford the monthly payments.  All other things equal,  shorter is better because it will save you money in interest.  Better loan terms are Fixed is better because you know what you're going to have to pay down the road.

The Worst Loan Type

The worst loan type is anything with "adjustable" in its name.  Adjustable rate mortgages rarely adjust lower.  They almost always adjust higher.  These mortgage have their place.  If you plan to make a home purchase and then sell again in a short time, an adjustable rate mortgage can save you money with a low introductory rate.  But if you're refinancing, you need to stay in your home for a while to recoup the closing costs.  An adjustable rate loan is not the best loan type to pursue.

The Best Interest Rate

The best interest rate is the lowest one you can get.  More importantly, though, it needs to be at least 2% less than your current mortgage rate.  Why?  No specific reason.  But this is a good guideline to keep in mind, otherwise the closing costs you'll pay to get the new loan might outweigh the money you'll save.  You'll stand a better chance of getting a good rate if you have a high credit score.

The Worst Interest Rate

The worst interest rate is one that doesn't save you money.  This may sound intuitive, but it isn't.  Let's say your current mortgage rate is 6%.  You have 20 years left on your mortgage with $150,000 in principal remaining.  You see that you can refinance into a mortgage rate of 5.5% for 25 years.  This may seem like a good deal.  But if you do the math, you'll uncover a saddening truth.  You'll actually pay almost $20,000 more over the course of your loan term in interest.  When you add the additional closing costs, it'll amount to a loss of about $23,000.  This is not the best deal out there.

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