How to Refinance Your Home Loan

Thinking of refinancing or buying a home? Now might be the time to get that loan.

Mortgage interest rates — which had been near historic lows for many years — have been rising in fits and starts, and may climb again.

So, it might pay off to lock in a rate now before home loan costs climb even higher. Here are some steps to follow when shopping for a mortgage.

Keep an eye on interest rates

Even small movements in mortgage rates can make a big difference in your monthly housing costs and in the interest you pay over the lifetime of your loan.

You can play with the numbers on a mortgage calculator like this one. But the point is that the more rates rise, the more it increases your monthly costs unless or until you lock in a rate on a home loan.

Use Money Talks News’ mortgage rates page to find the best home loan rate where you live.

Figure out if refinancing will pay off

Will you come out ahead if you refinance? The devil is in the details.

Refinancing to a lower rate lowers a monthly mortgage payment. But it only makes sense if the month-to-month savings exceed the cost of refinancing. In short, don’t do it unless you’ll stay in the home until you’ve saved more from the lower rate than you paid in refinancing fees.

Use an online refinancing calculator like this one to compute your break-even point. It will help you determine if a refinance makes sense.

A lower monthly mortgage payment is always welcome. Refinancing to a lower interest rate should drop your payment. But you can’t be sure, since the details depend on your loan amount, your credit score and other factors.

Learn whether you can get rid of mortgage insurance

If you bought your home with a down payment smaller than 20 percent of the purchase amount, you probably were required to buy mortgage insurance. Private mortgage insurance (PMI) charged on conventional loans typically can cost 0.5 percent to 1 percent of your loan’s value. You usually can drop PMI on a conventional loan once your equity reaches 20 percent.

Federal Housing Administration (FHA) mortgages include mortgage insurance, too. With FHA mortgages, you have to pay mortgage insurance for the life of the loan — refinancing is the only way out.

However, if you have 20 percent equity in your home when you refinance — whether through your payments or from appreciation of your home’s value — you won’t need mortgage insurance.

Decide if you want to extract cash

Home values have been rising in most parts of the country. That means you may have more home equity. One way to tap it without selling your home is to refinance and take out cash.

Consider a short-term adjustable mortgage

Thirty-year fixed-rate mortgages are a safe, traditionally popular choice. But an adjustable-rate mortgage (ARM) may meet your needs under certain circumstances — such as if you plan to sell your home before the loan’s introductory low-interest-rate period ends.

ARMs are attractive because their initial interest rates typically are lower than those of fixed-rate loans. But they are riskier: After a fixed-rate period, the interest rate can change regularly. The 5/1 ARM, for example, has a fixed rate for five years. After that, the interest rate can fluctuate each year — possibly higher, possibly lower.

Some ARMs adjust more often — twice a year or even every month. If the rate goes up, your mortgage could suddenly become a lot more expensive.

Have you refinanced your home or otherwise borrowed for a mortgage? Tell us about your experience at our Facebook page.

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