How to Refinance a House to Get Lower Payments
If you have an existing variable-rate mortgage or high fixed-rate home loan, you may want to consider mortgage refinancing as a method of reducing your monthly mortgage payments. Your current monthly payment is calculated based upon your repayment length and interest rate. For example, the same $200,000 mortgage with a 10-year repayment term and a 7 percent interest rate would require a much higher monthly payment than a 30-year repayment term at a 4 percent rate. Refinancing allows you to change the terms that dictate your monthly payment.
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Instructions
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Prepare and Refinance
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Obtain a current copy of your credit report. Loan interest rates are calculated, in part, on the basis of your credit history. Check your credit report to make sure that there is no suspicious activity or identity theft issues that need to be resolved. If your debt-to-credit ratio is high, or more than 60 percent, pay down personal loans and credit card debt. This will ensure that you are in the best possible position for obtaining a lower interest rate on your refinanced mortgage. You can obtain a copy of your credit report for free by visiting www.annualcreditreport.com.
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Shop around, and take note of loan terms offered by different lenders. Start by checking with your current mortgage lender. Ask your lender what kinds of refinancing it can offer you. Contact additional lenders, and ask similar questions. Conventional mortgage lenders consist of banks and online money lending companies such as LendingTree.com and Capital One Bank. If you are not comfortable researching loan terms on your own, obtain the services of a mortgage broker. A good broker will provide you with a variety of loan terms from different lenders and answer your questions about the refinancing process.
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Choose the lender with the best refinance terms. Usually this translates to choosing the lender that offers the best overall interest rate, but in some situations, this is not the case. For example, if one lender offers a 5 percent interest rate with a 30-year repayment term and another offers a 6 percent interest rate with a 10-year repayment term, the 6 percent term would be more desirable because you would end up paying thousands of dollars less in the long run. You must also beware of the distinction between fixed rates and variable rates. A fixed-rate loan maintains the same rate of interest throughout the life of the loan. A variable-rate loan, on the other hand, is subject to change at any time. It is best to avoid variable-rate loans.
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Fill out a refinance loan application with your chosen lender. This process will require you to state personal information such as your name, address, date of birth and Social Security number. You will also need to provide the amount that you need to pay off your current loan. Sign your application, and wait for approval from your lender. If you are approved, your new lender should pay off your old loan with the proceeds of your refinanced loan. Some lenders may have a different policy, such as issuing a check in the refinance amount. Be sure to check on this point with your new lender. Once your former loan is paid off in the refinance, you will be under no obligation to continue making monthly payments on your old loan. Rather, you will make payments according to the terms of your new, refinanced loan agreement.
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Tips & Warnings
Before refinancing, check with your current lender to find out if there are any penalty fees that will accrue for paying off your mortgage early. After applying for a refinanced loan, make sure that you continue to make your monthly mortgage payment until your new loan is approved and your old loan has been satisfied.
