- Your home: It may be worth refinancingbeautiful home image by Stephen VanHorn from Fotolia.com
As mortgage interest rates drop to historic lows, many homeowners question if refinancing is an option they should seriously consider. There are many reasons for refinancing. It can mean savings in your monthly payments, but more than payment savings should be considered. You must look at all the costs involved. If this is a home you plan to stay in long term, the savings may be worth the cost of closing a new loan. - If your goal is to decrease the payment, consider how long you intend to live in the home. Let's say it costs you $6,000 to close your loan, but you are saving $130 per month. Divide the $6,000 cost by $130 monthly savings ($6,000/$130=46.15). It will take you 46.15 months to break even. If you are planning to stay in the home longer than this amount of time, it is worth the cost to refinance.
- Everybody shops for the lowest interest rate, but few understand the APR which stands for Annual Percentage Rate. Briefly, certain lender charges such as the origination fee, processing fee, discount points, and prepaid interest from the date your loan disburses through the end of the month make up APR costs (these costs are shown to you in the form of a percentage). You might see a lower interest rate with a higher APR, or a higher rate with a lower APR. Look for the lowest APR accompanied by a low interest rate in order to lower your payment.
- Take a look at your promissory note which will spell out all terms of your old mortgage loan. It will tell you if you have a prepayment penalty, and the date it will end. Some loans that were originated in the period of time when sub-prime loans were available carried prepayment penalties. A borrower might have a penalty for paying the loan off within the first two or three years. Commonly, the cost of this penalty would be six months of interest. Example: Lets say your mortgage balance is $100,000 and your interest rate is 6 percent, and you have a six month prepayment penalty: $100,000 X .06=$6,000 in interest for a year. Six months (half) would cause your payoff to be $3,000 higher. Have your lender calculate any savings you might realize in a refinance, both with the penalty and without it, and how long you need to wait for it to expire before refinancing.
- Most mortgage approvals are done through an AUS (automated underwriting system), but care must be given to the mortgage history. Lenders look at the past two years of payment history on all accounts, but much focus is given to the last twelve months just prior to your application date. If you are not sure of late reportings, go to annualcreditreport.com and request your credit reports. This is free for you once per year. Look for duplications, errors and outdated accounts. You can dispute these by calling the customer service number given on page one of each report. This will increase your credit score. You should discuss required credit scores early on with your lender.
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