Refinance Your Home Loan the Smart Way

A refinance of a home loan simply means taking out a new mortgage to pay off an existing mortgage. You still must pay all the related fees and closing costs that go along with any mortgage, such as title insurance, as if you were applying for a new home loan. However, depending on how and when you refinance your home loan, you could save a good deal of money.

When to Refinance

There are two good times to refinance your mortgage:

  • If you have an adjusted-rate mortgage - that means the interest on your mortgage rises when the economic interest rate does. Your costs are low when the overall economic interest rate is low, but if the national interest rate rises, your home loan payments go up. If you refinance your home loan to get a fixed-rate mortgage, your interest rates would stay the same, no matter what the economy does.

  • If you already have a fixed-rate mortgage - the interest rate was set by whatever the existing rate was when you first got your home loan. If the national interest rate drops significantly, you could get a new fixed-rate mortgage with the new, lower interest rate.
Other things to consider are whether you plan on moving soon, or whether your home value may have gone down. The costs of refinancing your home loan will be included in your new monthly payments for the first few years, so if you move during that time, you may not save very much money after all. A good rule of thumb is that there should be at least a two-percent difference in interest rates between your existing loan and your new loan.

Checking the Costs

Some simple research can help you decide how to proceed. Call a lender or two to get a quote for a refinance home loan for your home. Ask for a quote about the new monthly payment - but also ask about the total cost of refinancing your loan. Knowing the processing cost will help you determine how long it will take before the extra expenses are paid off.

Gathering the Proper Paperwork

As with your first home loan, refinancing your home loan will require plenty of paperwork, new title insurance, and a home appraisal. Each lender's specific requirements for a refinanced home loan application will be different, but most usually require a copy of your latest pay stub or recent tax returns, a new title insurance policy, and a new appraisal of your home's current value. Fortunately, at least with your title insurance, you may qualify for a special "refinancing rate", which could keep down some of these extra expenses.

Before submitting your application, double-check to be sure it is filled out as completely as possible. Try not to leave any item on the application blank - if you aren't sure how to fill out a question, ask the lender for assistance. The more complete your application, the faster your bank can process your refinanced home loan.