Four Rules For Refinancing Your Mortgage

It’s still a good time to refinance. In fact, it’s a great time to refinance your mortgage. Interest rates remain at historic lows, and locking in a low mortgage rate could save you a lot of money—tens of thousands of dollars over the life of your mortgage. Refinancing now is a smart move, but it’s still a big decision. There are four rules you need to follow to get the best deal when refinancing.

If you are capable of refinancing your mortgage, you should do it. Mortgage interest rates have been very low due to economic indicators. The stock market was down 3 percent in January, and 88.5 percent of the time that predicts where the market is headed for the rest of the year, according to Barron’s. Since stocks have been down, mortgage interest rates have dropped to almost 4 percent again. This is an amazing deal, especially for homeowners who still have rates at or above 5.5 percent.

During a refinance, lenders will look at your debt to income ratio, your home’s value and your credit history to determine if you are eligible. Once you’re approved, start looking for a plan that will follow these four rules. If you hit all four, you’ll have a “home run” refinance.

1. Lower your mortgage interest rate

Today’s interest rates are low but people are still living with a 6 percent, 8 percent or even 10 percent interest rate. You should get a lower interest rate while the going is good because it may go back up. If you have 20 percent down on your house, your mortgage rate is higher than 5.5 percent and you have a good credit score, it’s possible for you to get a lower mortgage interest rate. Talk with your lender to see what options are available to you.

2. Lower your monthly mortgage payments

You will also want to look for low-risk ways to reduce your monthly mortgage payments. One way to do this is by lowering your interest rate. Another way is by extending your mortgage, but I don’t recommend that. If you already have a 30-year mortgage, taking out another one is a bad idea. You could also lower your monthly mortgage payments by making one extra payment every year on your mortgage. For example, if you owe $100,000 on a 30-year mortgage and you make thirteen payments per year instead of twelve, you’d save up to $20,000 in interest and shave seven years from the loan, which will help pay off your mortgage faster. Just remember to indicate that you want the extra payment applied to the principal of your loan.

3. Shorten the mortgage loan term

If you can only do one of these four rules, this is the most important one. Try to shorten the loan term: if you have 25 years left, try to get a 20-year loan, if you have 20 years left, try to get a 15-year loan, if you have 15 years left, try to get a 10-year loan. This is where you are going to save the most amount of money because you’ll reduce the amount of interest you’ll pay over the life of the loan.

4. Manage your closing costs

There are a lot of costs associated with getting a mortgage and the same goes for refinancing a mortgage. On top of the administrative fees, your house must be appraised, inspected and assessed. There might also be penalties for paying off your mortgage early, so be sure to check the details of your current mortgage agreement before moving forward with any plans. Try to keep the costs under $1,000, and make sure you can pay these costs off within six months to a year.

Now is a great time to refinance your mortgage. The new mortgage rules have just come into effect and it may take some time before we see their effect on the system. At the same time, homes that are underwater can also look for better financing at harp.gov. HARP is a government program that helps people refinance their homes. Check the website to see what options are available for you.

WSB Radio’s Ilyce Glink Show – February 2, 2014

To find out more about refinancing, click the audio link below to listen to the full Ilyce Glink Show on WSB Radio, or go to iTunes and download the show to your handheld device.

Download the podcast via iTunes

Thanks for listening.


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About Ilyce Glink

Author of 13 books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask. Writer of the nationally syndicated column, “Real Estate Matters.” Top-rated radio host in Atlanta. Writer for CBS MoneyWatch.com. Managing editor of the Equifax Personal Finance Blog.
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