Homeowners are constantly looking for ways to lower their monthly payments and the best way to accomplish this is to refinance their mortgage. By lowering the interest rate you can not only save money off of your monthly payment, but you can pay your mortgage off earlier since you won’t be paying as much in interest. Many homeowners decide to continue paying the old payment amount as a way of accelerating the payoff process. You will need to check into refinance rates to see what you can do.

The first step is to find a lender. This can be somewhat of a challenge so make sure that you take your time making a decision. There are many lenders online, but this is usually not the best option. It is always better to work with someone who is in your state so that they are current on your mortgage guidelines. Also, its easier to maintain paperwork if the office is local and you can walk into it if there is a problem.

The interest rate that you receive is based on a spectrum of criteria. It will involve your payment history, credit score, available mortgage balance, debt ratio, income level since your mortgage was originated and other factors. All of this info is pooled together to give you a target to shoot for.

One thing to watch out for when considering a lender is the typical “bait and switch” method. This is an old sales tactic and one that is highly prevalent in the mortgage industry. Do not be fooled by someone offering you a substantial discount from everyone else. Shop around and have all quotes in writing before you decide.

Also, you want to consider other factors besides the rate. Make sure what the upfront charge is, i.e., application fee, document fee, etc. Many of these junk fees can be waived if they want your business badly enough. Another thing to look out for are discount points, This is a way of receiving a lower rate- at a cost. Sometimes points are worthwhile, but only in certain circumstances. Have the lender do the math to decide if it is a viable option for you.

You want to make sure that you have all of the requirements of you before you sign anything. This will eliminate fees buried in the numbers that you might not be aware of until after you start the process. If a lender is going to be fair and honest they will have no trouble giving you the numbers in writing.

Shopping for refinance rates can pay off in saving you money on your home. As long as you take a few precautions, the process can be quick and give you breathing room until rates drop again.

Refinancing your mortgage can be a smart move if the benefits you’ll receive outweigh the drawbacks. Obtaining a mortgage with a lower interest rate or lower monthly payments can be very attractive and can even save you thousands of dollars over the course of the loan. On the other hand, there are fees involved in the switch.

WHAT IS REFINANCING?

To get a clear picture of the benefits available to you, it’s helpful to know the process involved in refinancing your mortgage. Refinancing your mortgage consists of paying off the loan you currently have and taking out a new mortgage loan. Your current loan gets paid off in the refinance when you close on the new loan.

However, it’s generally easier to obtain refinancing than it is to acquire a mortgage loan in the first place. Depending on the amount of equity you have in your home, it’s possible to make the switch without coming up with any cash up front other than incidental expenses, such as a new appraisal or title insurance. The closing costs, however, can all be rolled into the refinance.

Equity is the current value of the home minus what you still owe on it. Your equity increases each year as you make your mortgage payments and also from the increase in the value of the home.

For example, let’s say you bought your home 5 years ago. The price of the home was $100,000, you put in a $20,000 deposit, and you took out an $80,000 loan.

If your home’s value increased by $10,000 each year, it’s now worth $150,000, five years later. In the meantime, perhaps you’ve paid $3,000 on the principal of your home by making your mortgage payments. (In the first few years most of your loan payments go toward the interest, rather than the principal.)

So, $150,000 minus $77,000 (what you still owe on the loan) = $73,000. You have $73,000 in equity on your home in this example. You started out with $20,000 in equity and, in 5 years, you’ve increased it to $73,000.

WHAT DOES EQUITY MEAN TO YOU?

Your equity is what gives you all kinds of choices in refinancing your home. The more equity you have as a percentage of the value of your home, the more advantages you have when you refinance.

For one thing, for refinancing the home in the example above, you’re now searching for a mortgage loan for only 52% of the total value of the home, rather than the 80% you were looking for in the first place. This opens up a whole world of new lenders that would be willing to take on the risk of lending you the money.

Any time your equity is enough so that you’re financing less than 70% of your home’s value, it’s much easier to find lenders that will compete for your business, even if your credit leaves a bit to be desired.

In addition to making it easier to find a lender with more attractive terms than your original mortgage, your equity can also make it possible for you to obtain a good chunk of cash, which you can use to pay off your high-interest debts or make a major purchase.

CASHING OUT YOUR EQUITY

When you receive cash along with your refinance, it’s called “cashing out your equity.” Keep in mind, however, that whatever equity you cash out in your refinancing process becomes part of the money you’re borrowing with the new loan.

For instance, in our example above, you owe $77,000 on your current loan. When you refinance, your new loan may be closer to $87,000 if they roll the closing costs into the new loan. You won’t “feel” the costs of the closing, because you won’t have to pay them in cash, but they exist and get rolled into the new loan.

If you wanted to cash out some of your equity, but you still wanted to keep under the recommended 70% re-financing threshold, you would first figure 70% of your home’s value. At a $150,000 value, you could finance up to $105,000. So let’s say that the amount owing, plus the closing costs come to $87,000, ($77,000 is owed, plus $10,000 in closing costs), you could still cash out $18,000 and remain within your 70%. ($87,000 + $18,000 = $105,000)

If you have good credit, you could cash out even more of your equity and look for someone to finance 80% of the loan. This would give you another $15,000 in cash, but your new loan would be for $120,000 instead of the $77,000 you now have. Even with a lower interest rate, your mortgage payments would, in all likelihood, go up.

Refinancing your mortgage with an equity cash-out sometimes makes financial sense, even if you’d be starting out on a new mortgage loan for a higher amount than your current loan. You can pay off higher-interest debts or use the funds to make a cash purchase, saving yourself the interest you’d have to pay on taking out a loan for the purchase.

As long as you’ve gotten advantageous terms on the new loan and the payment is easily within your budget, you may find that you’re able to significantly raise your credit score, too. Paying off your current debts and making your new mortgage payments on time will build some great credit! Plus, you no longer have to make multiple debt payments each month.

Even though starting over on your mortgage loan can seem disconcerting, if you set it up with the bi-weekly payment system, where you pay half the mortgage payment amount every two weeks, instead of the full payment amount once each month, you can still pay off this new mortgage in record time!

There are both pros and cons to refinancing your mortgage:

PROS

1. You can lower your monthly payments.
2. You can lower your interest rate, saving you thousands of dollars in interest over the life of the loan.
3. You can change from a variable rate mortgage to a fixed rate mortgage.
4. You can cash out your equity:
✴ Use the cash to pay off higher interest debts.
✴ Consolidating your debts in this way means one monthly payment instead of many.
✴ You can pay cash for a major purchase instead of taking out a higher interest loan.
5. You can raise your credit score.
6. You can receive some nice income tax deductions:
✴ In the USA, if you itemize your deductions on Schedule A, you can deduct interest payments on your home’s mortgage. Credit card interest is not tax deductible.
✴ Essentially, by using your equity to pay off your credit cards and putting that debt into your home mortgage, you’ve lowered the interest you pay on your credit card debt while, at the same time, making it tax deductible.

CONS

1. You’re starting over on your mortgage, so it may take you longer to pay it off than if you had not refinanced it.
2. Your mortgage debt will be larger than before the refinancing, due to closing costs and if you take out some cash.
3. Your monthly payments may be higher if you cash out some equity refinance.
4. With the new mortgage, you may be subject to early pay-off penalties if you wish to pay off a large portion in the near future.
So the question of whether you should refinance your home depends entirely on your particular financial situation. It could do you a lot of good or it might not be to your advantage. Your best option is to consult with a financial advisor who can review your own unique situation.

HOW TO GET STARTED

If you’re considering refinancing your home, a mortgage broker can save you some time and trouble in finding a lender. You can usually get a good recommendation on a mortgage broker from a reputable real estate agent.

Your mortgage broker can work with you to find the most advantageous funding for your financial situation. Basically, you tell them what you’re looking for in a refinance (lower interest rate, lower payments, or cash out) and they take care of the details.

MODIFYING YOUR CURRENT MORTGAGE LOAN

There are some situations in which refinancing your mortgage isn’t an option. Unfortunately, with the recent downturn in the real estate market, many thousands of people have found themselves in an “upside down” situation with their mortgage.

If the value of your home has lowered since you first purchased it, you could owe more on your mortgage than the house is now worth. If this has happened to you, and you wish to obtain more advantageous terms on your mortgage, you might want to look into modifying your current mortgage loan with your current lender.

The government has instituted some recent programs that give lenders an incentive to help you out. You may be able to lower the interest rate, your monthly payments, or even the principal on the loan by modifying it.

However, most lenders have been slow to answer the call, and often end up foreclosing on the properties before they’ll modify the loan. Most lenders won’t even consider a loan modification unless you’re at least 30 days overdue on your payment. Then they may tell you they’ll consider it, taking up the time right up to the day they foreclose on it.

So trying to get a loan modification can be challenging, but it can be done. If you have a regular income and your financial situation is such that you would have no trouble making your payments if they were only a bit lower, your lender may be willing to work with you.

If this is your situation, contact your lender to apply for a loan modification. Then keep in regular contact with them by phone and fax.
✴ Contact the department heads for the various departments you work with as your application progresses.
✴ Send faxes to the specific departments requesting regular updates.
✴ Record your phone calls, if possible.
✴ Write down the name of anyone you speak with, the date, and a summary of each conversation.
The internet has many resources that can provide you with valuable knowledge for working with your lender. Just do a Google search for “Mortgage Loan Modification” and do your research for the full details on the loan modification process and how you can work with your lender.

With good communication and knowledge of how to make the process go smoothly, your loan modification can be a success.

If you’re not upside down on your mortgage loan and you’ve built up some equity in your house, it’s usually in your best interest to look into refinancing your mortgage rather than trying to modify your loan. Generally, refinancing is less stressful and more successful than a loan modification. Plus, refinancing also has a host of other benefits you may enjoy.