7 Tips for Refinancing a Home Mortgage Loan
“With mortgage rates still in the low 5-percent range, it is a great time to refinance a home,” says Ethan Ewing, president of Bills.com. “By following these suggestions, homebuyers can be well prepared to make their biggest investment – their home – an even better value.”
A refinance loan is a new loan taken out by a borrower to pay off the original home mortgage loan (if you’re buying a new home, you might find 6 Tips to Make Buying a House Easier helpful!). Refinancing a home mortgage loan can result in lower monthly payments, a shorter mortgage, and extra cash in hand.
Click on All About Mortgages: Insider Tips to Finance or Refinance Your Home in Today’s Economy by Julie Garton-Good for more info about home mortgage loans, and read on for Ewing’s tips on refinancing a home mortgage loan…
7 Tips for Refinancing a Home Mortgage Loan
1. Check your credit scores. “Check your score before applying for a refinance,” Ewing says. Interest rates vary depending on the borrower’s credit history, with the best rates going to those with credit scores of at least 740. Borrowers who can wait a few months to refinance a home mortgage loan can attempt to increase their credit score by paying all bills on time and paying off as much debt as possible.
2. Consider a shorter-term home mortgage loan. Borrowers who can afford to pay a little more every month on their mortgage might want to refinance into a 15-year, rather than 30-year, loan. The monthly payment will be higher, but the interest rate will be lower and overall interest will be less. Additionally, borrowers who have already paid their mortgage for several years will find that choosing a shorter term loan will avoid “resetting” the length of time until payoff.
3. Stick to the household budget. Standard guidelines call for keeping housing expenses below 35 percent of total income, and borrowers are wise to stay within that limit. “Be certain that a new home mortgage loan payment will be affordable,” says Ewing.
4. Research discount points. Points (or discount points) are a percentage of the purchase price paid upfront to obtain a lower annual percentage rate on the loan. Buyers who plan to stay in the home a long time might find that paying points makes sense. Those who do pay points will find that they usually are tax-deductible on a federal income tax return.
5. Don’t forget private mortgage insurance (PMI). Home mortgage loans with less than 20 percent equity require PMI in case the owner defaults on the loan. If a refinance puts a borrower below 20 percent equity, the lender will add PMI requirements – either as a monthly payment, as an up-front payment, or both. When the home owner pays a conventional mortgage down to 80 percent or less of the home’s value, he or she can request the lender to cancel the PMI and then be able to stop paying the additional amount. Meanwhile, PMI is tax-deductible, at least through 2010.
6. Don’t count on a high appraised value. These days, home mortgage loan lenders are very cautious about overvaluing homes. Appraisers are acting very conservatively, relying on comparative property sales figures from very recent sales. To get the best refinance deal, buyers should have equity totaling at least 20 percent of the appraised value.
7. Take advantage of government programs. If the home’s value has seriously dropped or you have an ARM on which payments have skyrocketed, federal government home loan programs might be able to help. The Making Home Affordable Refinance Program (HARP) allows borrowers with mortgage debt of 80 percent to 125 percent of the home value to refinance, in some cases without paying additional PMI.
If you have any questions or thoughts on these tips for refinancing a home mortgage loan, I welcome your comments below!
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Comment by Sarah C. on 2 September 2009:
Hi,
We refinanced our home loan and wish we hadn’t. There are disadvantages to refinancing home mortgages and I don’t see those here. Here’s a list from about.com:
Drawbacks to Refinances
Costs. If you are paying fees to obtain the loan, it is costing you money to get the loan, which you might not recoup through a lower interest rate for a number of years. To figure this out, add up all the fees. Figure out the difference between your old mortgage payment and your new payment. Divide that difference into the loan fees, which will equal the number of months you must pay on your new loan to break even.
If your loan fees are $4,000, for example, and the monthly savings will be $100 a month, it will take you 40 months to break even on the refinance.
Longer amortization period. Although you have the option of shortening your amortization period, you might not qualify for the higher payment nor may you want to pay more each month just to pay off the loan faster. Borrowers generally extend the term of the loan. If you refinance a loan with 25 years remaining for a new 30-year loan, you have turned what was originally a 30-year loan into a 35-year loan.
Bigger mortgage. By rolling the costs of your loan into the loan itself, you are taking out a bigger mortgage. A bigger mortgage eats away at your equity position. Moreover, if you take out cash, called a cash-out refinance, your loan balance will be increased.
Just wanted to add this,
Sarah
Comment by Jim on 2 September 2009:
Thanks for the info
Comment by Laurie Pawlik-Kienlen on 3 September 2009:
Yes, thanks Sarah for adding this info about refinancing a home mortgage! I hadn’t thought about the drawbacks, they’re good to know.