When to Refinance your Mortgage

The time is right to refinance your mortgage.  Rates are at historic lows - even lower than the rates several years ago that helped contribute to the housing boom and bust.

This time around, qualifying for a new mortgage isn't as easy. Most, if not all banks and lending institutions require proof of income and a good credit rating.

In addition to those requirements, the loan-to-value cannot exceed 80 percent, which means your home loan cannot exceed 80 percent of the value of your home.  This more stringent but traditional requirement is making it impossible for millions of home owners who owe more than 80 percent of their home's value or who are underwater (by owing more than their house is worth) to take advantage of record low mortgage rates. 

If your mortgage is quaranteed by either Freddie Mac or FannieMae you might still be able to refianance even if your mortgage debt is between 80% to 105% of our home's value.  Read more on the housing bailout

If you are some of the lucky home owners that meet these qualifications, here are some quick guidelines to follow when refinancing your mortgage.

The general rule of thumb to follow when refinancing is that if the rate you are refinancing at is 1 percent less than your current mortgage rate, you should save money in the long run.

You can buy down the mortgage rate by paying mortgage points, which is like paying interest in advance. A point is equal to 1 percent of the value of the loan, so a mortgage loan of $400,000 would cost $4,000 to buy down the rate by 1.00 percent. 

If you are planning to stay in your home a long time, buying down the mortgage rate makes sense. You can save thousands or tens of thousands of dollars in interest payments over the life of the loan. Buying down the rate will also lower your monthly mortgage payment.

Closing costs: Yes, even when you refinance your mortgage there are closing costs involved.  These costs include loan origination fee, lender fees, credit report, escrow fee, title insurance, recordings fees and an appraisal report. You might also have to pay some property taxes and home insurance in advance.

Your bank or lending institution can give you an estimate of the closing costs you'll pay on a refinance loan. The good news is these costs can be rolled into the loan so you won't have to come up with thousands of dollars out of pocket at closing.  

Do your due diligence and comparision shop for the best rate and deal just like you would when you shop for any large purchases. Doing so will save you a ton of money in the long run.