Refinancing Advice for Homeowners Looking for a Better Rate

If you are in the market for a better rate on your mortgage, you could probably use refinancing advice. The subject of refinancing can be quite confusing if you've never dealt with it before. There are many things out there that can hurt you financially if you don't watch out for them. Here are a few things that you should keep in mind when looking to refinance your home mortgage.

Interest Rate

One of the most important parts of the process is the interest rate. If you can't get a good interest rate, refinancing will not usually be in your best interest. Most of the time, when you refinance your home, you are doing so to reduce your monthly payment. Without a lower monthly rate, then a refinance may not be a good idea. You can find out what the general rate is out in the market place easily by visiting different websites and financial publications. Be aware of what is in the marketplace and compare it to the offers that you are receiving. If you have good credit, you should be able to get the best rate in the marketplace. 

Be aware of "teaser rates" with refinances as well. These introductory offers are only good for a short period of time during the mortgage. They might give you a very low rate for the first six months. Then the rate will increase significantly and you are stuck making a large payment for the rest of the mortgage. Make sure that you fully understand the interest rate and all of the fine print associated with it before you make any decisions. 

125% Loan-to-Value

A growing phenomenon in the lending market today is the 125% loan-to-value refinance. What this means is that lenders will allow you to borrow 125% of the value of your house. Therefore, you can get the house you want, and get more money on top of that to do what you want with. While this may sound like a very intriguing offer, it can get you in a lot of trouble. Depending on how expensive the house is, 25% of your home value might be a lot of money. You might not be able to pay off that portion of the loan for many years. This might not be an issue if you live in your house for 30 years, but if you plan to sell quickly, this loan program may not work for you. 

When you run into trouble with this program is when you try to sell the house. After you sell the house, you can pay off the majority of the loan. However, unless your house has appreciated greatly, you won't be able to pay off the entire balance from the sale of the house. You borrowed more than the house was worth and now that the house is sold, you have to pay off the entire balance. This means that you will still have the loan even after you sell your house. This can be crippling to your financial future. Watch out for these refinancing offers and think about the consequences.