Finance Blog
Four Rules For a Home Run Refinance
With mortgage rates dropping almost every week, right now is a great time to refinance. We have never seen mortgage rates this low—ever—so if you have the ability to refinance, do it. Even if you have already refinanced, if you can qualify for a mortgage rate that’s a percentage point lower than the one you have, you should consider refinancing again.
Talk to your lender or other lenders to see if you qualify for refinance. Lenders will often look at your income-to-debt ratio, your home’s value, and your payment history when determining if they will refinance your mortgage.
Once you have the go-ahead, start looking for a plan that hits four key areas—it will lower the interest rate, lower your payments, reduce the length of the loan, and manage the costs of refinance. Depending on your personal circumstances, you may not be able to hit all four categories, but if you do, you’ll have a home run refinance.
1. Lower the interest rate
With record-low interest rates coming out every week, chances are you can do better than the 11 percent, 7 percent, or even 5 percent interest rate you have now. Credit is a major factor in getting the lowest interest rates, so be sure to check your credit report and score before you start talking to lenders. If you’ve paid your mortgage on time and kept the rest of your finances in order, you may actually have a better credit score than you did years ago.
2. Lower your payments
Ideally, you want to pay less each month, and there are two ways to do this. The best way is by lowering your interest rate. The other way is by extending your mortgage—but don’t do that. If you took out a 30-year mortgage initially, taking out another 30-year mortgage is a bad idea. While lowering your monthly payments will give you more breathing room, it’s not worth the extra cost you’ll pay over the long term.
3. Reduce the length of the loan
If you can secure a low enough interest rate, you can reduce both the length of your loan and the cost of your monthly payments—and the savings can really add up. For example, if you took out a $250,000 refinance loan at 5 percent for 30 years, you’ll pay almost $230,000 in interest over the life of the loan. But shave five years off that same loan and you’ll save nearly $45,000.
4. Manage the costs of refinance
If you’ve bought a house, then you know that there are plenty of costs associated with securing a mortgage. The same goes for refinancing. On top of administrative fees, your home must also be appraised, inspected, and assessed. You may have to pay a penalty for paying off your mortgage early, so be sure to check the details of your current mortgage agreement before moving forward with any plans. Make sure you can pay these costs off within six months to a year, and try to keep the costs to under $1,000.
Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.
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Good points Ilyce. Homeowners really need to manage their purchase from the time that they commit to buying a home, all the way until the time that they sell it officially to someone else. Management of their purchase is really the key to what makes home-ownership profitable.
09-06-2012
Great advise–hope everyone reads and follows your directions.
Wade-Austin, Texas
How can you reduce mortgage costs on rental properties you own?
Hi S. Miller, I’m currently refinancing two of my investment properties, and hit a home run with one and a near home run with the other.
Although most big banks won’t refinance invenstment properties (Wells Fargo is the exception), many mortgage lenders work with banks that offer different rates based on similar creteria used to refinance a primary home loan. They also factor in how many motgages you own will ask to see additional inforation regarding your rental mortgages. It will help to have all of your mortage info, last two statements, rental agreements, property tax information and in some cases last two months of rents received. Rates are usually an eighth to a point higher for rental refis.
In addition, do you plan to sell your rental in the next 3 years? If so, you might be able to trade a slightly higher interest rate for closing cost credit. My lowest rate availalbe was 3.5, but I deceided to go with a no cost refi (lender pays most fees) at 4.25 because I plan to sell the house in 3 years.
I am fnding it impossible to keep closing cost to $1000.
Hard to keep costs under $1000 when you are escrowing New Jersey real estate taxes. Under $2000 is a “home run” in New Jersey.