Authored by Kate Beswick in Finance, Mortgages
Published on 06-10-2009
Refinancing your home can be a great way to cut your mortgage costs and lower your interest rates. However, some home owners don’t do their proper homework and research and therefore end up paying more money than they should. This is very counterproductive as most people look to refinance their homes so that they can lower their overall expenses. Lender fees, closing costs, and long mortgage terms can all add up to thousands of dollars that are coming out of your pocket, so it’s important to understand how you can cut refinancing costs.
The first most logical step is to get quotes from many different lenders and compare them. Lenders will often have hidden fees but they are required by law to include all the costs associated with refinancing your home into the contract. This means that if the lender has fees and costs, they will be included in your quote. When you are collecting your different quotes, make sure that you are using the same terms and interest rates so that you can compare them equally. Once you have all your quotes, read them over again and again to make sure that you understand who could give you the best refinancing terms.
Paying points is another great way to cut refinancing costs. The point system works by you paying additional fees in exchange for better terms or lower interest rates. One point will equal 1% of the loan amount that’s paid at closing. Paying for points is an additional cost initially but this can be a great way to save yourself some money. This is especially so if you plan on living in your home for a long time, which many refinancers plan to do.
Private Mortgage Insurance (PMI) is something that could end up costing you hundreds of dollars and should be avoided at all costs. PMI is sometimes required by lenders if you plan on borrowing more than 80% of your home’s overall value. PMI is set in place to protect the lender should you default on payments and eventually have a foreclosure on your home. However, PMI has no advantages for the homeowner, and so this is a cost that could be easily cut from refinancing. It’s also a good idea to keep more than 20% of your home equity in tact should you ever fall into hard financial times.
When you are refinancing your home, you will also need to decide whether you want a short or long term. Short term mortgages generally span about 15 years while long-term mortgages have a lifespan of about 30 years. Choosing a shorter term will help cut refinancing costs because there is much less risk to the lender. For this reason they generally have lower interest rates. Shorter loan terms do mean that you’ll be paying more for your monthly payment but you’ll be paying less overall in the long run!
Refinancing your home can be a great option for homeowners who are looking to save themselves some money over the next several years. However, it’s important that you fully understand the terms and conditions to make sure that you really are getting a good deal and cutting costs!
