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Should You Refinance? Make Sure the Timing is Right


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TERMINOLOGY

Deciding whether or not you should refinance depends on your personal financial situation. If interest rates are lower today than they were when you first took out your mortgage, refinancing makes sense. Or, if you bought your home with an adjustable rate mortgage (ARM) and are now afraid that any movement in interest rates may cause your mortgage cost to go up, you should consider a refinance.

Will Refinancing Improve Your Situation?

Making the decision to refinance a mortgage loan is based on how refinancing will improve your present loan situation. This requires some careful consideration. A seasoned professional who can show you the difference refinancing can make to your monthly costs is your best guide.

Understanding Interest Rates

The “timing” for refinancing is created by understanding interest rates for mortgages and how they move. With little movement in the sale of houses for awhile, the rates for mortgages have been fairly level or flat. 

As the economy recovers from a near financial meltdown, interest rates for new and existing homes will increase. As the buying increases, homeowners should see higher interest rates. The higher rates are a consequence of the housing market demand. Before rates shoot up too far, a homeowner looking to refinance should have determined if they qualify.

Tightened Lending Requirements

It should be understood that as lenders have tightened their requirements and made credit more difficult to obtain, borrowers who got caught up in some of the excesses of the credit crisis may have allowed their credit scores to fall. Lenders will take a hard look at credit and if your credit falls below their acceptable range for lending, you will be denied a loan. It is important that borrowers understand their financial situation and clear up any troubling issues that they can in order to qualify for a refinanced loan at the lowest possible rate.

Compare the Old Loan Versus the New Loan

Working with a trained professional will help you avoid any pitfalls associated with refinancing your loan and allow you to receive the best deal. You want to compare your current rate to the new rate and be sure there is a significant reduction.

Also, you should review the loan amounts of the old and new loans. Many times, the costs of the loan are rolled into the loan, significantly increasing the new loan amount.

The third important factor to consider is the payment terms of the loan. For example, if you have a 30-year mortgage, but have had it for ten years, you have a remaining 20-year mortgage. If you refinance to a new 30-year mortgage, you add interest to your mortgage over those ten years.