Mortgage Refinance Information: Lower Your Mortgage Payments

By MySpendingPlan.com Editorial Staff

If you are one of those lucky homeowners who took out their home mortgage when interest rates were at their historical low, you don’t need to worry about mortgage refinancing yet.  However, if you’re like many homeowners who are paying higher interest rates on their Adjustable Rate Mortgages (ARM) than what is available currently, or if your ARM is getting to the point where the fixed period is soon ending and the rate will float (which means increase these days!), you may want to consider a mortgage refinance.  Explore the mortgage refinance information below to learn more.

Understanding Mortgage Refinancing

A mortgage refinance loan is one where you take out a new mortgage loan to pay off your old mortgage so that you can get a loan at better terms.  By refinancing your mortgage loan, it is possible to get lower interest rates, thereby lowering your monthly mortgage payments.  Even though rising mortgage interest rates are a big concern these days, your credit score may have improved or your equity in the home may have increased (due to rise in value, principal you have been paying down, or both).  This could help you get a better rate.  You could even refinance your mortgage so as to pay off the loan quicker and build additional equity in your home.

Things to consider when exploring mortgage refinancing:

• Will the next interest rate adjustment on your ARM cause a major increase in your monthly mortgage payments?
• Are you paying interest at a rate that is more than 1.5% to 2% higher than the current rates? 
• Has your FICO credit score increased since you first took out the mortgage?
• Do you understand the full cost of mortgage refinance?

Know The Costs of Mortgage Refinancing

Mortgage refinancing involves many additional costs such as loan processing fee, early prepayment charges (for the previous mortgage loan), title search fees (to confirm ownership of the home), appraisal fee, mortgage insurance, closing costs, inspection costs and points.  Read the fine print and demand details from the lender or mortgage broker!

Points refer to a percentage of the loan amount (1 point = 1%) that the lender may tack on so that you can get the lowest interest rates possible.  Most mortgage refinance companies charge anywhere between 0 and 5 points to refinance your mortgage.  If you do not want to pay the points upfront, you may have to bear higher interest rates on the refinance loan, which may effectively defeat the entire purpose for the refinancing.

Therefore, only after you have calculated the total cost of mortgage refinancing and evaluated that the new home loan (mortgage refinance loan) will indeed save you money, should you go for refinancing.

When is Mortgage Refinancing The Right Choice?

• Interest rates are lower now than when you originally took out the mortgage.
• If you have an ARM (adjustable rate mortgage) in which the initial fixed interest rate is low and then gets higher as the term goes on, you should refinance before the initial period is over.  This way, you get the benefits of low interest rates in the beginning of the ARM and can take advantage of lower interest rates (fixed for the rest of your loan) with the new fixed rate refinance mortgage loan.
• If you have an ARM and are tired of having to adjust your monthly mortgage payments every few years and want the stability of fixed monthly payments.
• If you want a mortgage loan with a shorter term so that it can be paid off earlier and you can build home equity that much faster.
• If you wish to “draw upon” the built up equity in your home and use that money for other major expenses.
• Your credit score has improved enough that you may get a better interest rate.

On the whole, mortgage refinancing does seem to be a good option in today’s market scenario.  Make sure you account for the costs we discussed when making your decision.  With interest rates on the way up, you can lock in lower interest rates a long time by opting for mortgage refinance.  In addition to this mortgage refinance information, you can also use refinance calculators to figure out if mortgage refinancing is the right option for you.