What You Need to Know When You Refinance Your Home

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As mortgage rates continue to be some of the lowest in recent years, an increasing number of homeowners have made the decision to refinance their homes. In fact, Fannie Mae and Freddie Mac have refinanced millions of homes in the last year or so. Most of these loans have been fixed rate mortgages, regardless of whether the original loan was adjustable or fixed. The reason is simple. Most homeowners today are wary of adjustable rate mortgages and crave the security that fixed rate mortgages offer.This spells good news for borrowers because fixed rate mortgages are available just a fraction of a point higher than ARMS while offering far more stability. In fact, some homeowners have been able to actually save additional money by refinancing from a previous 30 year mortgage to a 15 year mortgage. By home refinancing, this means that they can pay off the mortgage loan in a shorter amount of time and save a tremendous amount of money in interest while also enjoying affordable monthly mortgage payments.If you are considering refinancing your home in the near future, there are some important things you should know. First, do pay attention to your credit score. Always check your credit score before you apply to refinance your home. The interest rate that is available to you will depend upon your credit history. The best rates will only go to those who have a minimum credit score of 740. If your credit score is not in that rage, try to wait a few months to refinance and give yourself time to improve your credit score by paying off as much debt as you can and being sure payments are sent in on time.You may benefit by consider a shorter term mortgage. Consider whether you can afford to pay a little bit more each month in order to obtain a 15 year loan over a 30 year mortgage. While the monthly payment might be slightly higher, you will likely have a lower interest rate and will pay less interest in the long run.Review your budget and be sure you do not stretch your payments beyond what you can realistically afford. It is best to try to keep your total housing expenses below 35% of your total income. Make sure you figure in all of your housing costs, including homeowner’s insurance.In some cases, it could be worth it to go ahead and pay for discount points upfront in order to gain an even lower interest rate. This can be especially beneficial if you know that you are planning to remain in the home for a long time. Also, you may be able to deduct the cost of the points on your income tax return.Keep in mind that if your mortgage has less than 20% equity you will have to pay for PMI or private mortgage insurance. This applies even if you are refinancing. The cost of the PMI may be required as a monthly payment or could be required as an upfront cost. Either way, this is an additional expense that you will need to plan for. Do not make the mistake of overlooking this as it could make the difference between your monthly payment being affordable and suddenly breaking your budget.Remember that lenders tend to be very wary regarding the values of homes today. Consequently, appraisers are taking a conservative approach as well. As a result, you should not set your hopes on a higher than average appraised value. In order to obtain the best deal for your upcoming refinance, you should set your sights on having equity of at least 20% of your total appraised value.Be sure to check out available government programs. You could very well be eligible for such programs if you have an adjustable rate mortgage and your payments have recently increased or your home value has dropped. The Making Home Affordable Refinance Program, also known as HARP, makes it possible for homeowners who have a mortgage debt between 80% and 105% of the home’s value to refinance without the need to pay additional PMI.Currently, mortgage rates are still quite low, meaning that there has never been a better time to refinance your home if you can meet the qualification guidelines. Following the suggestions above can help you to ensure that you are prepared for the refinance process and that you can obtain the best deal possible when the time comes to refinance your mortgage loan.

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