Score the Best Home Loan: Mortgage Refinance Essentials

The home mortgage refinance loan that best works for you will lower your monthly payments in a home you keep long enough for those lower payments to offset the cost of the loan. But there is more to refinancing than rates. The following information will give you the essentials for knowing if your home mortgage refinance loan is best for you.

Know Your Aim

It is essential in finding the best home mortgage refinance loan that you know what you want to accomplish. There are costs associated with refinancing, and you want to ensure your goals are in concert with the required steps to make refinancing work for you.

In refinancing, a home owner takes out a new home loan with a lower interest rate, pays off the existing home loan and reduces the total amount of the loan by the amount of equity in the home and reduces the monthly payment with the lower rate. As with a traditional mortgage, even the best home mortgage refinance loan will have closing costs, fees and, possibly, points to be paid.

If your aim is to sell your home soon, for example, in a year, the best home mortgage refinance loan that significantly lowers your monthly payment will likely cost you money. As a general rule of thumb, it will take two years for you to recoup your costs if you get an interest rate two percent less than your current rate.

Refinancing is not a quick fix for someone who want to lower monthly costs now and sell their home soon.

Know Your Home’s Value

The amount of money you can borrow and the interest rate you are offered in a traditional mortgage or a refinance will vary depending on your credit score, but these will also be impacted by your home’s value. Often, it is in a declining housing market that interest rates drop. If your home has lost value and eroded your equity, you might not be able to borrow enough to pay off your existing loan.

Know Your Credit Score

Every borrower has a credit history maintained with the three primary U.S. credit bureaus, and that credit history is a major factor in calculating your credit score. Even if your home’s value justifies a refinance, if your credit score cannot get you a better interest rate, you likely will not get the best home mortgage refinance loan.

Know Your Interest Rate

Many home owners got into their homes with an adjustable rate mortgage, which is also called an ARM. This type of mortgage has a lower initial rate than you might normally qualify for, and after a set time the rate rises. It is common to seek your best home mortgage refinance loan before your ARM interest rate rises. It is essential you first know your current rate, then know your adjustable rate and be certain to get a lower rate on the refinanced mortgage so you can recoup your costs.

Know Your Costs and Terms

Finally, it is essential that you know all the costs associated with the home mortgage refinance loan that’s best for you. And it is essential you know the terms of your original mortgage. Only by knowing your refinance loan costs can you calculate what interest rate will recoup those costs in a given time. And you must be certain the initial loan terms allow prepayment without penalty.