4 ways to maximize your refinancing savings

Posted by  on Jul 25, 2014

Lower interest rates can represent a golden opportunity for homeowners to save money by refinancing. If you get that opportunity, how can you be sure you are making the most of it? Don't just settle for a lower refinance rate. Work to get the lowest mortgage rate available under the circumstances.

This is one of those situations where little things mean a lot. Shaving a few basis points off refinancing mortgage rates may seem like an exercise in minutia, but those small numbers are multiplied by the high dollar value associated with mortgage balances and then multiplied again by the long period of time covered by a mortgage loan. When those multipliers are taken into account, those small numbers can add up to big dollars.

Here are four things you can do to get those numbers working in your favor so as to maximize your refinancing savings:

  1. Go short. Fifteen-year mortgage rates are running about 90 basis points lower than 30-year rates these days. So if you refinance to a shorter loan, you can really goose your refinancing savings. You can save even more if you are willing to take on an adjustable-rate mortgage (ARM). The obvious drawback of an ARM is that it leaves you exposed to the possibility that rising interest rates will increase your payments in future years; but if you think you will be in a position to pay off your mortgage in just a few years, you can limit that risk.
  2. Clean up that credit score. Mortgages are priced based on risk. (The riskier the loan, the higher the mortgage rate.) Interest rate premiums charged to people with lower credit scores can be as much as 3 percent. Repairing damaged credit can be a long-term process, but there are things you can do that will have a short-term benefit, such as addressing any mistakes on your credit report and paying down any large credit balances.
  3. Put some cash on the table. Another thing that determines the perceived riskiness of a loan is the loan-to-value (LTV) ratio. Basically, the larger the loan is relative to the value of the property, the higher the interest rate will be. Depending on the circumstances, a high LTV ratio could add a percent or two to your refinance rate. So if you do not have much equity, think about putting up some cash to pay down principal. After all, with savings account rates these days at just a fraction of one percent, saving a point or two on your mortgage rate might be a better use for your savings.
  4. Play the field. It may be easiest to refinance through your current lender, but this means you could miss out on the best mortgage rates available. Compare mortgage rates from multiple lenders before committing to a new loan.

Perhaps the most important tip for realizing refinancing savings is to make sure you do not miss an opportunity to refinance. Unusually low mortgage rates may seem like they have become the new normal, but the fact is that current conditions are really quite rare. Any delay could mean missing the opportunity altogether, if mortgage rates revert back to anything more like their historical norms. Remember, too: The sooner you act, the sooner you could start saving money.

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