These tips for refinancing a home mortgage loan include information about credit scores, monthly budgets, and the benefits of paying off your mortgage early.
“With mortgage rates still in the low 5-percent range, it is a great time to refinance a home,” says Ethan Ewing, president of Bills.com. “By following these suggestions, homebuyers can be well prepared to make their biggest investment – their home – an even better value.”
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A refinance loan is a new loan taken out by a borrower to pay off the original home mortgage loan. If you’re buying a new home, you might find 6 Tips to Make Buying a House Easier helpful!
Refinancing a home mortgage loan can result in lower monthly payments, a shorter mortgage, and extra cash in hand.
7 Tips for Refinancing a Home Mortgage Loan
1. Check your credit scores. “Check your score before applying for a refinance,” Ewing says. Interest rates vary depending on the borrower’s credit history, with the best rates going to those with credit scores of at least 740. Borrowers who can wait a few months to refinance a home mortgage loan can attempt to increase their credit score by paying all bills on time and paying off as much debt as possible.
If your credit score is weak, read 7 Smart Ways to Get Rid of Credit Card Debt Forever.
2. Consider a shorter-term home mortgage loan. Borrowers who can afford to pay a little more every month on their mortgage might want to refinance into a 15-year, rather than 30-year, loan. The monthly payment will be higher, but the interest rate will be lower and overall interest will be less. Additionally, borrowers who have already paid their mortgage for several years will find that choosing a shorter term loan will avoid “resetting” the length of time until payoff.
3. Stick to the household budget. Standard guidelines call for keeping housing expenses below 35 percent of total income, and borrowers are wise to stay within that limit. “Be certain that a new home mortgage loan payment will be affordable,” says Ewing.
4. Research discount points. Points (or discount points) are a percentage of the purchase price paid upfront to obtain a lower annual percentage rate on the loan. Buyers who plan to stay in the home a long time might find that paying points makes sense. Those who do pay points will find that they usually are tax-deductible on a federal income tax return.
5. Don’t forget private mortgage insurance (PMI). Home mortgage loans with less than 20 percent equity require PMI in case the owner defaults on the loan. If a refinance puts a borrower below 20 percent equity, the lender will add PMI requirements – either as a monthly payment, as an up-front payment, or both. When the home owner pays a conventional mortgage down to 80 percent or less of the home’s value, he or she can request the lender to cancel the PMI and then be able to stop paying the additional amount. Meanwhile, PMI is tax-deductible, at least through 2010.
6. Don’t count on a high appraised value. These days, home mortgage loan lenders are very cautious about overvaluing homes. Appraisers are acting very conservatively, relying on comparative property sales figures from very recent sales. To get the best refinance deal, buyers should have equity totaling at least 20 percent of the appraised value.
7. Take advantage of government programs. If the home’s value has seriously dropped or you have an ARM on which payments have skyrocketed, federal government home loan programs might be able to help. The Making Home Affordable Refinance Program (HARP) allows borrowers with mortgage debt of 80 percent to 125 percent of the home value to refinance, in some cases without paying additional PMI.
For more financial tips, read Money and the Law of Attraction – 4 Ways to Attract Wealth.
If you have any thoughts on these tips for refinancing a home mortgage loan, I welcome your comments below!