Refinancing Your home the Right Way

The past few years have seen an explosion in the number of home refinancing deals, spurred on in part by the record low interest rates. When most homeowners refinance their homes, they do so to get a lower interest rate, and thus a lower monthly payment. The process of refinancing involves getting a new mortgage, and using the proceeds of that new mortgage to pay off the existing home loan.

While the decision to refinance a mortgage can seem like a no brainer, it is important to consider a number of factors to be sure that refinancing is really the right decision for you. For instance, before you refinance, it is important to consider the closing costs you will have to pay. If you are considering a refinance with a higher monthly payment (in order to pay off the loan more quickly), it is important to consider other options for that extra money. If you could make a greater return by investing the extra money, it may be better to hold off on the refinance deal.

It is also important to determine whether or not you are paying private mortgage insurance, or PMI. If you have enough equity in your home to cancel the PMI, you may be able to save substantial money without refinancing.

It is also important to determine if your loan requires a prepayment penalty. Some mortgages charge such a penalty, and this could affect the cost effectiveness of refinancing.

Of course the number one consideration for most homeowners when it comes to refinancing is the interest rate. If interest rates have dropped substantially since the original mortgage was originated, refinancing can result in a substantially lower monthly payment.

It is important as well to consider closing costs and how they affect the mortgage refinancing options. In most cases, refinancing makes the most sense when the difference between your current interest rate and the new interest rate is at least two percentage points. Even with a smaller difference, however, refinancing can often make sense as long as the closing costs are reasonable.

It is important to consider asking the lender to lock the interest rate for a specific period of time, generally from 45 to 60 days. This interest rate lock-in will protect you in the event that interest rates rise before the closing date. Any such lock-in should be provided in writing.

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