How To Refinance Your Home

By Cory Shuett, 23 Jan 21:06

You have an Adjustable Rate Mortgage (ARM) that was doing so well that you bragged about it. Now interest rates are rapidly rising.

Since the stress is hindering your work, you figure you should wave that low, flexible interest rate goodbye and get a nice, secure fixed-rate loan.

This is a normal situation as interest rates increase and many homeowners switch from an ARM to a traditional loan.

Switching types of mortgages is one reason to refinance your home. This means to replace an existing mortgage with another. However, there are some other ways to do this:

1. Lower your interest, but keep your term. When rates decrease, take advantage of it by lowering your monthly payments but keeping your mortgage length the same.

2. Take care of that balloon payment. You opted for a short-term ARM with a balloon payment. Now the due date is coming, and you must get a longer-term loan.

3. Shorten your term. Lower interest rates, or an increase in your income, mean you can pay down your principle quicker.

4. Credit rating change. Take advantage of a better credit rating and relieve yourself from the high rate you accept before.

5. You need money. You might be able to refinance for more than what you still owe on your home. Lenders limit the Loan to Value for this loan at no higher than 70 percent.

Most of the fees, title insurance and appraisals that go with the original mortgage are true for a refi. This means that it can be expensive to change loans. How fast you recover the cost depends on how long you plan to keep the mortgage. If you are going to be in your home long enough to recover the costs and benefit from lower interest payments, then it's an easy choice. Balancing the cost with the benefits of a new mortgage is easy. Check out Mortgage 101 and Bankrate for calculators to help.

Remember that closing costs include another appraisal (no matter when it was), a new credit report, underwriting fees, title insurance, escrow fee, recording fees and other small fees. These costs normally range from $1500-$2000, though some lenders could ignore the closing costs for a higher interest rate loan.

You can pay points on a refinance loan, just like on an original mortgage, but unlike with the original mortgage, the points are tax deductible over the entire term of the loan. Points make sense when rates are increasing and you want to get the lowest rate possible.

Points must be dealt with, except in some cases. If you are paying a 1-point fee on a $100,000 refi, you can add $1000 to your closing costs.
You also need to look at your current mortgage to see if there are pre-payment penalties. Your old mortgage is paid off by the new loan, as are any other claims. At the end of the refinance process, you should have only one loan, preferably.

However, if you have more two mortgages, it's possible to refinance just one of the loans if the lender agrees.

The best way to figure out if refinancing is good for you is to figuring how long it will take you to pay off the closing costs. If this is longer than the time you will stay in the house, then refinancing is probably a good option. You will have fewer tax breaks with a lower-rate refi, so be sure to ask your lender for a refinance break-even table that will take that into consideration.

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