Three Rules of Thumb for Mortgage Refinancing

You might think that deciding to refinance a mortgage requires only a quick comparison of loan interest rates. Unfortunately, that’s not really true. Refinancing is trickier than that! Fortunately, three useful rules of thumb can often help you make sense of refinancing opportunities.

Rule 1: Don’t Ignore Total Interest Costs

You really want to use refinancing as a way to reduce the total interest cost you pay. While that sounds simple in principle, it is sometimes difficult to do. The interest costs you pay are a function of the interest rate, the loan balance, and the loan term period.

When people refinance, they tend to focus solely on the loan interest rate. But they often don’t pay as much attention to the loan term or the loan balance.

When you use refinancing—even refinancing at a lower interest rate—to increase your borrowing or to extend the time over which you borrow, you often aren’t saving money.

Rule 2: Trade Expensive Money for Cheap Money

For refinancing to make economic sense, however, you do need to swap higher interest rate debt for lower interest rate debt. This calculation, however, is tricky. To make an apples-to-apples comparison, you must look at the annual percentage rate that will be charged on your new loan—this is the best measure of the new loan’s interest rate cost—and then compare this to the loan interest rate on your old loan.

You don’t want to compare interest rates on the two loans nor do you want to compare annual percentage rates on the two loans. Again, just to make this perfectly clear: You want to compare the loan interest rate on the old loan to the annual percentage rate on the new loan.

When the annual percentage rate on the new loan is lower than the loan interest rate on the old loan, then you are truly paying a lower interest rate.

Comparing annual percentage rates with loan interest rates seems confusing at first. But note that you would pay only interest on your old or current loan, so that’s all you need to look at in terms of its costs. With a new loan, however, you would pay both interest and any origination or closing cost fees. The annual percentage rate wraps the interest rate charges and setup charges, origination charges, and closing cost fees into one interest rate-like number.

Rule 3: Don’t Lengthen the Repayment Period

Be careful that you don’t extend the length of time you borrow by continually refinancing. For example, one common rule of thumb states that every time interest rates drop by two percentage points, you should refinance your mortgage. However, there have been times in recent history when following this rule would have had you refinancing your mortgage every few years. This could mean that you would never get your mortgage paid off. If you refinanced every few years, you would suddenly find yourself still 30 years away from having your mortgage paid.

american home mortgage servicing

For accepting acceptable mortgage quotes, it's important that you acquire a able-bodied accustomed mortgage broker/lender that has a acceptable acceptability in the market. Investing time in enquiring about and allotment a acceptable mortgage broker/lender is abiding to pay acceptable assets (this is abnormally accurate for mortgage brokers). Moreover, if you cannot assurance a mortgage agent or a mortgage lender, afresh you would not be able to acknowledge the complete and absolute capacity about your affairs etc and appropriately you would not be able to get the best mortgage quotes. As such, you will be abundant added adequate in discussing the mortgage quotes (and attainable options) with accession you trust. Once you acquire the mortgage quotes, you should be able to accept the assorted acceding and altitude on it. If you don't accept commodity on the mortgage adduce or if you acquire questions about the mortgage quote, you should get them antiseptic with your mortgage agent or mortgage lender.

In adjustment to ensure that you get the best mortgage deal, you charge consistently get and assay a cardinal of mortgage quotes. Do not go with the aboriginal mortgage adduce that you receive. Explore your options with assorted mortgage quotes. However, this does not beggarly that you ask anybody and anyone for mortgage quotes. You should get mortgage quotes alone from acclaimed mortgage brokers and mortgage lenders, and accede alone those mortgage quotes that baby to your requirements and action flexibility.

The aboriginal affair you'll appetite to do afore you alpha attractive at the assorted mortgages and mortgage lenders attainable is accept what a mortgage is, how the action works and who takes part.

Mortgages are artlessly methods of appliance your claimed acreage or absolute acreage to defended your acquittal of a debt. The appellation mortgage comes from the French chat for afterlife vow. It refers to the acknowledged agency that is acclimated to defended the property, although it best frequently refers to the debt that is anchored by that mortgage. In added words, the acceding mortgage and mortgage accommodation are frequently acclimated interchangeably.

In aloof about every administration mortgages are associated with loans that are accustomed on absolute acreage rather than on any added acreage such as baptize craft. There are cases breadth raw acreage is mortgaged as well. The accepting of a mortgage artlessly agency that individuals or businesses use the accustomed adjustment of purchasing either bartering or residential acreage afterwards accepting to pay the abounding bulk on their own immediately. So there are residential mortgages and bartering mortgages frequently provided throughout the apple on a accustomed basis.