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Important Tricks to Know when Refinancing

02/25/2015

Today, finding a mortgage lender willing to help with refinancing is not difficult. After all, they have a vested interest in getting a homeowner to sign on the dotted line. Unfortunately, many homeowners are unaware of “refinancing tricks”. Therefore, anyone interested in swapping a current mortgage for a new one should take a little time to learn what some lenders choose not to reveal.

Insider Refinancing Tricks

  • The better the credit score the lower the interest rate. However, some people are unaware that within a relatively short amount of time, the FICO score can change. Certain actions have a direct impact on credit so understanding what these are will help maintain or even increase FICO, thereby making it possible to lock into a lower rate.

 

  • Another trick about refinancing has to do with the type of loan and the amount of interest paid. Even though interest rates are currently at historical lows, an individual still wants to secure the lowest rate possible. Typically, an Adjustable Rate Mortgage or ATM has the lowest interest rate compared to a Fixed Rate Mortgage or FRM. Long-term, an FRM is usually the better route but for someone who does not anticipate living in the home more than 10 years, a 7 or even 10-year ARM will reduce the monthly mortgage payment.

 

  • Another thing to know is that as of January 2014, the Consumer Financial Protection Bureau adopted some new rules for mortgage lenders. Under these rules is a determination as to what a Qualified Mortgage is and is not. Because of this, people interested in refinancing a home are no longer gouged with additional fees and penalties. Additionally, lenders are limited to fees and points of no more than 3 percent on “qualified” loans of $100,000 and higher.

Additional Helpful Information

Refinancing a home to secure a lower interest rate is a great idea but there are expenses involved. Extra costs have to be paid up front at the closing, there could be additional fees for an appraisal, mortgage points, attorney fees, and so on. To determine if refinancing is the right decision, the total expense involved should be added up and the months it will take to pay for the new mortgage calculated. If it takes longer to recoup the costs of refinancing than the time the homeowner plans to stay at the property, then it becomes obvious that this is not the best option.

Understanding the mortgage trap is also critical since the insurance premium for a refinanced loan could increase the monthly payment. Most lenders mandate that at minimum a home have 20 percent equity. At this level, Private Mortgage Insurance or PMI on a conventional type loan is no longer required. However, if switching to an FHA loan, mortgage insurance lasts the life of the loan whereas it does not with a conventional loan. Again, this is something that needs to be carefully weighed out when deciding if refinancing is the best course of action.

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