How to Refinance Your Mortgage for Best Results

Posted by  on Nov 11, 2010

Refinancing your mortgage is a significant financial decision, as it requires paying closing costs. Before considering potential refinancing scenarios, it's important to review your overall finances for determining how refinancing can best meet your needs:

  • Identify your goals for refinancing: Lower interest rates? Paying off your mortgage faster? Consolidating consumer debt? Your answers can help with finding the best refinancing terms for you.
  • Refinancing costs and risks: Refinancing mortgages means taking out a new mortgage to pay off your existing mortgage. You pay closing costs, which offset potential refinancing savings. Cash-out refinancing can be risky; if home values drop, you could owe more on your mortgage than your home is worth. Refinancing to a shorter repayment term requires higher monthly mortgage payments. This could add to potential hardship if you have financial problems later.
  • Home equity: Conventional mortgage lenders may not refinance beyond 80 percent of your home's current value. If your home value has decreased, you may not have enough home equity. Bear in mind that your new mortgage lender will base its loan approval on an appraisal.
  • Determine how much additional cash you'll need. If you're refinancing for additional cash out, you'll need to estimate how much extra cash is needed for debt consolidation, home repairs, remodeling or other purposes.
  • Estimate potential savings and break-even period: Having a rough idea of how much you save by refinancing can help determine if refinancing is worthwhile.

Mortgages: Selecting a refinance mortgage

Here are four refinancing options and how they can help. Contacting your current mortgage lender and obtaining mortgage quotes online can help with finding your best deal.

  • Traditional refinance: Also called "straight refinancing," the purpose of this transaction is simply lowering your existing mortgage rate. You can also convert an adjustable rate mortgage (ARM) to a fixed rate mortgage (FRM) and eliminate exotic mortgage terms by refinancing to a FRM.
  • Shorter repayment term: Refinancing from a 30 year to a 15 year mortgage can lower your mortgage rate and potentially save thousands over time. Use a mortgage calculator for comparing your current mortgage term to a shorter refinance term.
  • Cash-out refinance: Use this refinancing option to lower your mortgage rate and take out additional cash for paying off bills, home repairs, or remodeling.
  • HUD/FHA refinance program for underwater mortgages: If you're current on your mortgage payments and owe more on your mortgage than your home is worth, you may qualify for an FHA refinance to a lower mortgage amount. Your current mortgage lender and any home equity lenders must agree to participate according to FHA guidelines. Your existing mortgage can't be an FHA loan to be eligible for this program.

Researching these options and reviewing several mortgage quotes can help you find the best solution for refinancing your mortgage.


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