How To Refinance a Loan

Refinancing a loan is not that much difference than getting the first mortgage.  The bulk of the decision really lies in whether you are truly saving money by doing a refinance.  However, the nuts and bolts of helping to make that decision is best left to another article.

Once you have chosen to refinance, there are several steps you need to follow. 

  1. Find a new mortgage provider.  Don't forget to check with your existing mortgage provider as well.  You may find that in their interest to keep a good mortgage customer, they will offer you a deal on your refinance.  That could save you money in closing costs and/or interest rates.  At the very least, it may save you some of the paperwork headache.
  2. Decide on a term.  If you have been paying a while on your existing mortgage, you may not want to start the process over again with a 30-year loan.  You may be able to shorten the time frame, lower the payments, and still save money if your interest rate drops enough.
  3. Shop for the best interest rates.  While this isn't necessarily your only consideration, it certainly ranks up there as one of the most important.  This decision goes hand in hand with deciding what type of loan you want.  For example, do you want a fixed rate loan, or an adjustable rate loan (ARM)?  Don't choose the wrong loan type for your circumstances just because that one has the best rate.
  4. If you are choosing an ARM, you'll also need to decide on the ARM terms.  Most ARMs have an initial period where your interest rate is locked.  That can often vary from 2 years to as much as 10 years.  The interest rates usually vary depending on how long the rate is locked.  You should also make sure that your interest rate has a cap.  In other words, make sure it can't go up more than 5% over the life of the loan.  You also want to know how quickly it can go up.

Depending on the value of your house and the amount of the loan you are trying to get, you may be required to do an appraisal.  However, I wouldn't pay to have one done until the mortgage company requests it.  They may not like your choice of appraisers and you don't want to pay twice.  

Don't forget to watch out for a prepayment penalty.  Some loans do carry them and if you try to refinance again, or pay the loan off completely within a certain time period, you will pay a penalty.   

There are different reasons why people refinance.  Some want to change the type of loan, from an ARM to a fixed rate loan for example.  Others refinance just to lower the interest rate.  Still others want to take advantage of equity in the house to finance other interests: such as paying for college educations, paying off credit cards, or taking a vacation.  Just remember that just because the monthly payment goes down does not mean that you are paying less over the whole term!


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