Refinancing your mortgage is one of the best ways to save money during the course of your loan. Interest rates can change the “cost” of purchasing a home by hundreds of thousands of dollars, and when they lower, you are missing out on incredible savings that improves the health of your investment and the health of your bank account.
Refinancing, however, is one of those tricky tools that is not as simple as applying for a new loan each and every time the interest rate goes down. There are many things that you need to consider before you can be absolutely sure that refinancing is a viable option. Below are some of the top questions about refinancing that are asked by those looking at this valuable cost savings tool.
Commonly Asked Question 1: When is the Best Time to Refinance?
The first and most important question asked by homeowners is when they should refinance. Interest rates fluctuate with some regularity. There are going to be times that interest rates are a little lower than your current interest rate, as well as times that your interest rates will be higher.
There is no exact method for determining the best time to refinance, but experts believe that you should definitely refinance if you meet the following criteria:
- The interest rate is roughly 2% lower than your current fixed interest rate.
- You plan on staying in your home for at least two more years, if not longer.
- You do not expect the interest rates to drop considerably further for a few years.
The savings with refinancing are fairly incredible, but so are the fees that can be associated with closing out an old loan to replace it with a new loan. As such, if you believe there is any likelihood that you will be selling your home any time in the near future, you should probably consider not refinancing. If you plan on staying in your home for many years with no intention of selling, and the interest rates have dropped an acceptable degree, refinancing is highly recommended.
Commonly Asked Question 2: Are There Options Other Than Refinancing?
When the nation’s interest rates lower, refinancing is the best way to ensure you can take advantage of the cost savings. It is the number one way to get a significantly lower interest rate from a company that offers the most competitive option.
But there are other ways to save money on your loan too – and one such option is with renegotiating your loan, rather than refinancing. Renegotiating involves calling your lender and requesting the ability to renegotiate your loans. Lenders do not want to lose your business and recognize that refinancing is an option, so they may be willing to renegotiate your turns.
However, it should be noted that, while renegotiating is a possibility, you may not get as low an interest rate as you would if you refinanced. But if you trust your lender, you are working out a good payment system, and renegotiation is a possibility, it may be something to look into.
Commonly Asked Question 3: How Soon Can You Refinance?
It is not uncommon to find yourself in a less than ideal loan situation not long after applying for the loan. This may be due to problems that you had with your credit that have since been resolved, or simply misinterpreting an interest rate as a good deal only to find out that there are better deals available.
As a result, you may want to refinance your mortgage as soon as possible. If so, rest assured that you can easily refinance your mortgage any time after signing the paperwork. However, it should be noted:
- Some lenders require at least 1 year on your current mortgage.
- Lenders that do not require that single year may not be trustworthy.
- Changing loans this quickly could harm your credit considerably.
It is those reasons above that stress the importance of shopping around and trying to get the best deal on both your mortgage and your refinancing, so that you do not have to refinance your loan in the first place.
Answering Your Questions
Refinancing is a great way to lower monthly payments and help you reduce the costs of your loan, but like any major financial commitment, you must spend as much time as possible researching everything there is to know about refinancing before you consider it.
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Time is both finite and fleeting. As such, we have a limited amount of time to do the things we wish to do, before the marginal value of making the right decisions decreases dramatically. Though it would be great if we could wait as long as it takes in order to make sure the best available decisions can be made, sometimes it is more important to get started and deal with the consequences when they occur.
This is especially true when it comes to getting loans. While it would be ideal if we could wait as long as it takes to make sure we get the best available rate possible, the value of buying our first home when we are one hundred years old is far less than the value of purchasing our first home in our thirties. We do not have the opportunity to wait decades for the best interest rate to come. Instead, we need to take the information that is available so that we can take the loan as soon as possible with the least financial repercussions.
But interest rates do change, and when they lower to below your current interest rate – enough below that the amount you save over the course of the loan is significant – you will no doubt want your loan to reflect that lower interest rate. That is where refinancing comes in.
What is Refinancing?
Refinancing a loan is when a lender (usually a new lender) purchases the total amount of the existing loan, providing you with the same amount owed at the current, lower interest rate. You can refinance multiple types of loans including, but not limited to:
- Home Loans (Mortgages)
- School Loans
- Secured and Unsecured Loans
However, refinancing home loans is by far the most common, as it represents one of the best ways to save thousands upon thousands of dollars over the course of your loan, simply by lowering your interest by a single percentage point.
Benefits of Refinancing
Refinancing has a variety of benefits that make it a great option for those looking to reduce the overall cost of owning a home. Some of these benefits include:
- Considerably Lower Monthly Payments – On a $300,000 30 year mortgage at an interest rate of 7%, you will be making monthly payments of $1995 per month – nearly $2000 each month. But if that interest rate is lowered to 6% APR, monthly payments drop all the way down to $1798. That is nearly $200 in savings per month.
- Considerably Lower Overall Payments – The higher your interest rate, the more you are paying for your home. Using the above example on a 30 year mortgage, you would have paid $718,200 over the course of your loan, whereas by simply lowering the interest rate by 1%, you pay $640,280 – a savings of almost $78,000.
Both of these are very beneficial. Not only do you save thousands of dollars over the course of your loan, but you also pay less every month, giving you additional spending money. Overall, if you can successfully refinance your mortgage, you can save a considerable sum of money.
Weaknesses of Refinancing
Refinancing does have a few drawbacks. The first drawback is that many mortgage lenders have a variety of fees and penalties for paying off loans early, specifically designed to ensure that you are less inclined to refinance with a new lender. Sometimes these fees can be fairly hefty, and ruin some of the benefits of completing the refinance.
Another lesser weakness is that refinancing will temporarily drop your credit score. Though it is known to have a “bounce back” effect that occurs after you have made a few payments, for a while your credit score may be lower than you deserve as credit bureaus look to ensure that your refinancing has not affected your financial status.
Finally, these benefits are significantly reduced if you expect to leave your home within a few years. Closing cost fees and other expenses for refinancing can completely reduce the financial benefits of refinancing – unless you expect to stay at your current location for an extended period of time.
Refinancing is a Something to Always Consider
You should always be on the lookout for the right time to refinance. While it is not advised to be constantly refinancing your loans each time your interest rates drop, should interest rates drop by a substantial margin and you plan on staying in the home for a while, there are a number of financial benefits to refinancing your mortgage loan.
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Refinancing your mortgage is only as valuable as the amount you save with your monthly payments. As such, you need to be absolutely sure that you have received the best refinancing option available, so that you can save the most money possible over the course of your mortgage payments.
In order to receive the best available refinancing on your mortgage, consider the following tips about locating the best loan for you.
Tips About Refinancing
- Shop Around
As with all financial commitments, it is very important that you shop around to find the best deal available on refinancing your loan. Look for the lowest interest rates, the least amount of fees, the fewest hidden charges and a lender that is known to be trustworthy. Only by carefully reviewing all of your options and weighing the risks and benefits can you be sure that you will get the best rate on your refinanced mortgage.
- Keep Your Credit Score High
Refinancing is not strictly about the loans themselves – it is also about the criteria that decides how much of a loan/interest rate you can receive. One of the best ways to make sure that your interest rate is as low as possible is to make sure that you are doing everything you can to improve your credit. Try to lower your credit card balances, make sure you pay off monthly fees, and do your best to resolve any disputes that may be harming your credit. Once you have improved your credit, you are far more likely to find a good loan, and a good lender.
- Shop Within 30 Days
Credit scores have a tendency to drop when you shop around with a variety of lenders. Though they will recover – and fairly quickly – they do have a tendency to create problems , especially if you continue to search for lenders after your credit score has dropped (indicating you may not get the best rate). However, if you condense your search to a single 30 day period, your credit score will not drop as much as if you spread it out over a few months, which will improve your chances of getting a rate you can use.
- Talk to Your Lender About Renegotiating
Many lenders are willing to renegotiate your loans, which will help improve your chances of getting a low rate without being forced to pay extensive fees or find a new lender. However, be warned that current lenders do not often go too much lower than your current interest rate, and often do not cancel the closing costs. Still, some lenders do, and thus it is an option you should check before you refinance with a new lender.
- Consider Waiting
It is always a good idea to research the economic climate and see what the chances are of the interest rate falling further. The lower the interest rate goes, the better a loan you can receive – but be warned, at any moment the Federal Reserve can increase the interest rate, resulting in less savings. Waiting is best when the interest rate is only at 1 to 1.5% lower, as the savings – while useful – are not so spectacular that you must take advantage of it right away. If interest rates are 2 or more percentage points lower than your current interest rate, refinancing is a great option.
Making Sure You Refinance Correctly
You always have the option of refinancing again over time, should interest rates drop further and your credit score improve. But it is still a good idea to try your best and refinance correctly the first time, by finding a loan that offers you the lowest interest rate possible, with the least amount of fees. Constant refinancing can result in hefty fines and penalties, in addition to harming your credit score. And, in addition, you will have paid off more of your loan over time, and the result of your refinance is not going to be as significant.
That is why it is important to do whatever you can to get the best refinancing deal available. By following the above tips, you improve your chances of finding a great refinancing option and saving thousands of dollars for years to come.
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Refinancing is designed to lower your monthly payments on your mortgage loan and ensure that you are able to save the maximum amount of money over time. But despite it’s obvious benefits, it is still a complicated process that involves keeping up to date with current information regarding the methods used to refinance, refinancing law, and other pieces of knowledge that come from learning as much as you can about refinancing before deciding whether or not it is right for you.
Refinancing is a constantly changing lending tool that can benefit all homeowners across the nation. Here are several facts about refinancing that may provide you with information you can use to help make your refinancing decision.
Facts About Refinancing
- Benefits of 2 to 3 Years
These days, owning a home is as much an investment as it is a place to live. As such, many people purchase a house that they only plan on living in for a short period of time. According to various estimates, it is recommended that you only refinance if you are planning on staying in your home for at least two to three more years. Only by doing so will the amount you spent to refinance (often about $3,000) be covered by the amount you saved. So if you are planning on moving any time in the near future, refinancing is not an option to consider.
- You Have 3 Days to Cancel
Refinancing law in the United States allows you 3 days to cancel any transaction that uses your home as collateral, so if you change your mind at the last second, you still have 72 hours to legally cancel the loan. Cancellation can still be a difficult process, though, so try to do all of your research ahead of time. If you do not get a form from your lender designed to allow you to cancel within that time period, send a signed, dating letter requesting cancellation and make sure you have proof of both that letter and its postage.
- Beware of Scams
Refinancing is fraught with scams. Lenders try to sell you on various interest rates without allowing you to read the fine print or recognize the high cost of fees they have associated with your loan. It is always a good idea to go with a company that you know is trustworthy if possible. If you end up having to pay just slightly more in order to ensure that the lender you are using is one you can trust, you should do so.
- Only Mortgage Refinancing Should Use Your Home as Collateral
There are a variety of options with refinancing that may sound very appealing. For example, you can refinance your credit cards or your car using the same refinancing loan as you do your mortgage. But you never want to risk putting your home up as collateral by adding to the existing debt on your house. Only your mortgage should be based off your home’s value. If you need to refinance other items, consider an unsecured loan instead.
- Try to Avoid Variable Rate Loans
Variable rate loans can have a variety of benefits, but when you are refinancing your home loan, you are very likely doing so because the current interest rate is such that it represents a great value. Try to fix into that rate instead, and then if somehow the interest rates lower considerably more over the next few years, you can reevaluate your loan at that time and see if refinancing is yet again right for you. Variable rates may rise up to higher levels than your initial loan, making the refinancing worthless.
Know Your Facts About Refinancing
Refinancing is valuable, and not something to take lightly. It is very important that you keep an eye out for scams, know your rights, and make sure you do all of the mathematics involved in ensuring that you truly gain considerable value from the refinancing loan you choose. Only by carefully considering every aspect of refinancing should you consider it a viable financial option, regardless of the obvious benefits it has on your home value and your wallet.
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