If you’re paying on a high-interest rate loan, want to pay off your loan or mortgage sooner, or are stuck in an ARM (Adjustable Rate Mortgage) that’s about to increase, here’s how to refinance a home loan.
Why Refinance?[cite::219::cite]
There are plenty of good reasons you might want to refinance your loans. While your situation may vary, here are some of the most common reasons people choose to refinance their loans:
Save Money - A lower interest rate means lower interest rate payments. A 1 percent reduction in your interest rate on a $200,000 mortgage might save you $125 a month. Over the course of a 30-year mortgage, that adds up to a savings of more than $45,000.
Lower Payments - Refinancing can lower your payments. In addition to taking advantage of lower interest rates, you may also be able to restart the clock on your loan. This means you can take longer to pay your loan off and start with a smaller balance, which in turn means lower payments.
There can be a tradeoff between lower monthly payments over a longer term (which can lead to higher overall interest paid) or higher payments over a shorter term (which leads to a faster payoff and lower interest paid overall). Make sure you understand the consequences.
Pay Your Loan Off More Quickly - You can also refinance your loan with a shorter term.
Debt Consolidation - If you have multiple loans or debt, you may be able to consolidate them into a single loan and pay off higher interest rate loans.
Change Your Loan Type - If your financial situation has changed since you took out the initial loan, there may be advantages to changing the type of loan you have. Maybe your credit score has improved significantly enough that you can get better terms. You might find yourself able to pay a bit more each month if you can shave years off the loan and avoid the interest costs. You might also find you need a lower payment at this point in life and can extend the loan.
In addition, you may be stuck in a variable-rate loan or an ARM with a pending balloon payment. Switching to a fixed rate can provide a stable monthly rate that you can plan on. Locking into a low rate is best for long-term home buyers.
Pay Off A Loan That Is Due - Some loans have to be repaid on specific dates or have balloon payments due as a lump sum. If you don’t have the cash to pay the lump sum — or don’t want to deplete your savings — an option might be to refinance instead.\
What to Avoid in a Loan or Mortgage
There are some pitfalls you need to be aware of when you are learning how to refinance a home loan:
Closing Costs - Just like in your initial loan, refinancing can be expensive. With home loans, you will pay closing costs, which can add up to thousands of dollars. You will want to make sure you take these fees into consideration when looking at the total cost.
“Hidden” Charges - While the charges must be disclosed legally, they may not be obvious unless you are looking for them. For example, many online lenders often tack on processing and origination fees. Using a mortgage broker can also lead to additional fees you might be able to avoid with a bank.
When evaluating which bank is best for refinancing, ask about all fees.
Higher Interest Costs - When you lengthen the term of your loan, you will pay more interest on the debt. You want to make sure that those lower payments don’t add up to higher total interest payments over time.
Other Home Refinance Tips
It’s important to factor in costs and fees and not just look at the interest rate. These fees can add up quickly and undermine the potential savings.
What mortgage rate you qualify for depends upon several factors, including your credit rating. In general, consumers with higher credit scores can qualify for lower rates than those with lower scores. Lenders will also look at your debt-to-income ratio to make sure you are a good credit risk and the amount of equity you have already built up in your home.
Your ratio of equity-to-home value is also a consideration. In some areas of the country, home values have declined, which means you may have less equity than you thought.
Read the terms and conditions carefully. Too many consumers see the lower rate and commit to the deal without checking fees or finding pre-payment penalties they didn’t have in the original loan.
What the Best Bank Offers
There are plenty of options when you think about how to refinance a home loan. When deciding which bank is best for refinancing, you’ll want to look for a bank that does the following:
- Offers re-fi loans with low closing costs, appraisal fees, or application fees
- Offers fixed, adjustable, principle and interest or interest only rates so you can get the best fit for you
- Will provide you with a loan estimate in writing that is easy to understand
- Uses automated underwriting for quick approval
- Enables quick closing times
- Minimizes paperwork
- Is comfortable and personable to work with
Home ownership is one of the most important, and largest, financial decisions you will make in your lifetime. You want to make sure you are making the best decision possible and work with the best home refinancing bank.
Every situation is different. Let the mortgage professionals and refinancing specialists at National Bank of Arizona customize the best solution for you.