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Five Points to Consider Before Refinancing Your Home


20120503102854 20 6 orig Five Points to Consider Before Refinancing Your HomeWith mortgage rates at a record low and the chance to climb out from beneath a disastrous adjustable-rate loan, many are finding that refinancing their home is the best option to lower their monthly payment and even avoid foreclosure.
You’ve weighed the pros and cons and have decided that refinancing your home is a wise financial option. Before you start shopping around for a new lender, there are certain points and potential issues to consider.

Are You Living in Your Dream Home?

Are you currently residing in the house you plan to enjoy with your grandchildren, or do you consider it a “starter” home? Before shopping around for a lower interest rate, it’s important to determine if you’re currently living in the house of your dreams, because this could be a major deal-breaker. If this is a permanent home, or at least one you plan on living in for at least two to three years after your mortgage is paid, go ahead and refinance. If your life goal involves moving out long before your financial obligation is met, refinancing might not be the best option.

Understand What Refinancing Means for You

You understand the concept of refinancing your home and that the process involves replacing your existing mortgage with another agreement, but how can this decision affect your monthly payment or loan’s length? Depending on your mortgage agreement, refinancing a loan can help you secure a lower interest rate, which can significantly reduce your monthly payment. It can also allow you to switch from a 30-year loan to a 15-, 10-, or in some cases, five-year mortgage. You’ll lower your interest rate, but shortening the life of your mortgage also translates into higher monthly payments. The upside is you’ll pay less over the loan’s life, which can save you thousands.

Know Your Credit Score

This may seem obvious, but becoming intimately acquainted with your credit score is still worth mentioning. Aside from having a dramatic effect on your interest rate, a lower credit score lessens your options and can even make it impossible to refinance at all. On average, a credit score of 720 is required to secure the most favorable interest rate, but it’s still possible to secure bad credit loans if your score is around 620 and you meet other requirements.

Shop Around for the Best Customer Service

You can scour the Internet until you develop carpal tunnel syndrome, but you probably won’t find many differences in the interest rates of various lending institutions, brokers and banks. Narrow your search to the top six candidates, but don’t let the final decision be based solely on the interest rate. Take into consideration other factors, including the loan’s terms, the bank’s reputation and how you’re treated during the initial process. If a reputable lender is willing to work with you to make the refinancing process as straightforward as possible, consider choosing them over one that offers a quick fix with little intervention, because you might end up regretting this convenient decision.

Closing Costs and Hidden Fees

Your past experience with closing costs, appraisal fees and home inspection fees has prepared you for this round of mortgage paperwork, right? If you secured your original mortgage several years ago, it’s important to realize the cost of closing has gone up, and if you cannot afford to shell out at least 20 percent for a down payment, your new loan might require private mortgage insurance. Otherwise known as PMI, private mortgage insurance is basically your lender’s way of covering itself in case you don’t meet your obligations. Depending on your loan’s terms, you can expect to pay at least an additional $50 to $100 dollars each month for your PMI. Speak to your lender and inquire about any hidden fees or costs and factor these into the true price of refinancing your home.

For some, refinancing their home is a way to lower their monthly payment or even avoid foreclosure. For others, it’s a decision based on misinformation and one that could end in a costly disaster. Do your homework, have a frank discussion about your future home-purchasing plans and speak to several lenders before determining if refinancing is the most prudent decision for you.

Image from Flickr’s Creative Commons

About the Author: Oliver Myers is a guest blogger and real estate agent. He’s currently considering refinancing his home and using the equity to remodel his kitchen.

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