Refinancing a mortgage can save a mortgage borrower hundreds of dollars a month in interest payments or allow him to adjust his amortization schedule and begin to build home equity quicker. Even in the current marketplace, where banks have tighter lending restrictions, every mortgage borrower has many options to consider when attempting to refinance.
The first place for a borrower to look for refinance options is with their current lending institution. The borrower's current bank will provide the borrower with current interest rates and at times may elect to refinance the mortgage without going through a typical and grueling underwriting practice. Thanks to Federal home affordability programs, the borrower's current lender may also benefit by refinancing a mortgage. If the current lender is unable to refinance the mortgage, there are still other options available.
Various websites allow a borrower to fill out a quick application before being matched with a variety of lenders with different offered rates. This application does not run a credit report or perform an appraisal, so the rates aren't guaranteed. These websites allow you to view rates for various mortgage products including 30, 20, and 15 year amortization loans, 5/1 ARMs and interest only mortgages. The mortgage comparing websites allow a borrower to negotiate with the lenders and at times receive discounted points and closing costs. Due to tighter lending restrictions, some of the websites will only take applications for borrowers who want to borrow less than 90% of their homes value.
Before deciding to accept the refinance, the borrower should consider whether refinancing is in his best interests. The easiest way to determine whether refinancing your mortgage makes sense is to figure out when the mortgage interest saved will equal the amount paid in closing costs.
Consider an individual looking to refinance a $200,000 mortgage. Assuming a 6% interest rate his monthly payment would be $1,099 per month (30 year amortization). If he is able to refinance down to 5% interest, the monthly payment would now be only $1,074 per month, a savings of $125 per month. Assuming the borrower paid points and closing costs totaling $3,000, it will take 24 months to break even on the refinance ($3,000 / $125 = 24 months). If this borrower plans to keep the mortgage for more than 24 months, then refinancing will be a good idea. If the borrower plans to refinance or sellg within 24 months, then he will lose money on the refinance.