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Unbiased Financial Information Provided by Financial Finesse

Looking to reduce your monthly payments? Want to switch from a variable rate loan to a fixed rate loan? Those are good reasons to refinance your mortgage. Many times we can save money but there are also times when the costs to refinance outweigh the benefits. Here are some tips for making a good decision about refinancing.

Tip #1: Start with your existing lender. Since your lender knows you, there might be preferential rates or other terms available for you. Your lender may be able to modify your existing loan or may have refinance specials for existing customers. This may be less expensive and require less documentation than refinancing with a new lender.

Tip #2: Determine how long it will take to make up the cost of refinancing. If you are looking to get a better rate but have upfront fees from the lender and the title company, your savings may be offset by the fees. A general rule of thumb holds that if you can make up the fees within two years through a lower rate (and payment), it may be worth the cost of refinancing.

 

RatePayment
8.5% loan$2,153/mo
6.75% loan$1,817/mo
A $3,000 cost to refinance will be made up in nine months

 

Tip #3: Be careful not to extend the term. If you have been paying on your 30 year mortgage for 10 years and go to refinance it for another 30 year term, you have just extended your payments for an additional 10 years. Match the term of your new loan to the remaining term of the old loan. For example, get a 20 year loan instead of a 30 year loan. In some cases, it may be better for you to keep your old loan.

Tip #4: If you want to combine your first and second mortgage to get an overall better rate, make sure to calculate the sum of the parts. If your first mortgage has a good rate but the second mortgage (or line of credit) has a higher rate or a variable rate, you might be better off keeping the loans separate. It could be better to refinance only the second mortgage to a fixed term rate. Consider this example:

 

Combining the two loans
First mortgage 6% 250,000 $1,499
Second mortgage 8% 80,000 $587
  330,000 $2,086
New loan 6.75% 330,000 $2,140

 

The savings is lost because even though the second mortgage rate is substantially reduced, the first mortgage rate increases. The payment actually increases.

 

New second mortgage only
First mortgage 6% 250,000 $1,499
Second mortgage 6.75% 80,000 $519
  330,000 $2,018

 

This would save over $800 per year by refinancing just the second mortgage.

Tip #5: Read the fine print when signing the loan documents. Double check the interest rate and compare it to the one you were quoted. Also, check to see if the closing costs are reasonable and in line with the estimates you received. Make sure there is no pre-payment penalty, otherwise paying off your mortgage early could be costly.

Tip #6: When interest rates are low, go long. Don't be fooled by current low non-guaranteed variable rates. Even though the fixed rate loan payment may be a bit higher, the rate is guaranteed to stay the same for the life of the loan. So consider a 15-year or 30-year fixed loan when interest rates are low. Since 1989, 30-year mortgage rates have averaged 6.45%.

Remember that everyone's situation is different. If you are planning to be in your home for a number of years, you can make up the fees quickly, or you want a fixed rate, refinancing might be the right step. If your loan fees are high or you plan on moving soon, maybe it's better to stick with what you have.