How To Refinance for a Better Interest Rate

First mortgages, home equity lines of credit, car loans - all of these can usually be refinanced if the need arises.  People do it to get a better rate, lower the payment, or shorten the term of the loan.  Some try to do it for all three! 

Most people refinance to get a better interest rate.  Before I go any further, let me be clear.  Just because you get a lower interest rate does NOT necessarily mean you are saving money over the life of the loan!  You may lower your monthly payment yet still pay more over the long term.  If you lengthen the term or pay closing costs, you could end up paying more of the life of the loan.  Do the math! 

Now that I've gotten that out of the way, one of the best ways to save money is to pay a lower interest rate on money you've borrowed.  That makes refinancing a popular thing to do.  But how do we do that? 

  1. Determine the value of the item you are trying to refinance. If it's a house, get an estimate.  You may eventually need an appraisal from your new lender, but you don't want to pay for one prematurely.  The lender might require you use an appraiser of their choosing.  You don't want to pay twice!  If it's a car, look up blue book value online to see what the value is of your particular vehicle - with all the options and mileage. 
  2. Decide what your new terms are going to be. If you've already been paying on the existing loan for a while, you can sometimes get your new loan for approximately the same term as you have left to pay.  Mortgages aren't quite as flexible, so people that have been paying for a while will often end up with a 30 year mortgage again. 
  3. Shop around! Your credit score is going to rank right up there as the most important factor in getting the best rate.  However, if you're trying to get a loan for more than the value of the item you're refinancing, that will usually increase your interest rate some.  Check will the traditional companies: banks, credit unions, mortgage companies.  Don't forget to check with the non-traditional companies also, such as online lenders.  You might also find that an organization you belong to has an agreement with a particular lender to lower the rate by a 1/2 %.  It may pay to check these out. 

These days you can check with so many lenders from the comfort of your house using a phone and a computer.  You can get preliminary rates and follow up with those that look the most promising.   

Lenders will probably pull a credit report before they offer you a firm rate.  If several lenders do this within a fairly short period of time, it will usually only affect your credit score as if only one lender had checked.  If too many lenders check over an extended time period, it will lower your score - which could raise your interest rate!  So do all your preliminary work ahead of time and get the official rates from the lenders over a short period of time.  That will help keep the refinance from unnecessarily dinging your credit.


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