Have you considered refinancing, but aren’t sure how, when or where to do it?  Let’s try to make this easy – check out the following guide to refinancing.

What does it mean to refinance?

Refinancing is the modification of an existing loan to change the terms, amount, or interest rate.

Reasons to Refinance

• You need some fast cash for home improvement, education, or paying off a car or credit card
• You wish to pay down principal aggressively (and save on interest)
• You want to change the term length of your loan
• You want to take advantage of lower interest rates
• You’d like to consolidate debts
• You want to change from an adjustable rate loan to a fixed rate loan

What are common misperceptions about refinancing?

• You can refinance at any time, anywhere
• You will always benefit from a refinance if interest rates have dropped

The truth is, you will have to qualify for a refinance.  This means that banks can turn you down if you have bad credit, if your home doesn’t appraise high enough, if you’ve been late for payments, and for a variety of other reasons. You are never guaranteed a refinance, and lending laws been much stricter over the past few years.

You should also realize that you will only benefit from a refinance if interest rates have dropped so much that you will recoup the expenses of closing costs over the lifespan of the loan. Always do the math before refinancing your home.

What should you investigate before refinancing your home?

Before refinancing, you should find out how much your home will appraise for.  Compare the currently available interest rates to your current loan rate. Look into the cost and benefits of buying points. You should also explore term options (15-year, 30-year) and available loan types (adjustable rate, fixed rate, balloon). You should also get a copy of your credit report and take action to clean up anything that may be hurting your credit score so you will qualify for the best loans.

Refinancing Terms You Need to Understand

Familiarize yourself with the following terms so you’ll feel confident negotiating with your lender:

Interest Rate – This is the percentage of the loan the bank skims off your loan each month in exchange for lending you the money. Your monthly payments always go first to pay off interest, and principal second. Many people refinance when the Federal government lowers interest rates because they can pay lower monthly payments.

Points – Points are charges you end up paying during a refinance. Each point is worth 1% of your total loan value. You can usually pay points upfront when refinancing in order to get a lower interest rate from the bank.

ARM – ARM stands for adjustable rate mortgage, which is a loan attached to your home’s value that changes over time in accordance with the current interest rate. If your ARM has a balloon, it means it starts out at one (lower) rate, but will increase at a set date in the future. Many people realize they want to refinance just before a loan balloons.

FRM – FRM stands for fixed rate mortgage, which is a loan attached to the value of your home that always charges the same (fixed) interest rate each month.

Closing Costs – These are the expenses associated with refinancing. They can be application fees, appraisal fees, lawyer’s fees, etc. It’s important to compare the closing costs with the anticipated savings of a refinance to make sure you’re getting a good deal.

Refinancing Pitfalls to Avoid

• Refinancing just before moving  (you won’t recoup the closing cost expenses)
• Refinancing when interest rates haven’t fallen sufficiently (won’t recoup costs)
• Assuming a refinance will free up cash (your home may appraise at a low price)
• Refinancing with your current lender (the competition may offer better options)

Helpful Refinancing Tools and Resources

• You can use this refinancing calculator to determine if refinancing will work to your advantage or not.
• Check out this mortgage calculator to figure out exactly what your monthly payments will look like if you refinance at different rates and loan terms.

Refinancing Basics

Now that you’re armed with the essential information, you can determine if a refinance is in your best interest.  Get started on a home refinance.