Refinance Mortgage Rules

Many people wonder about the right time to refinance a mortgage. There is additional expense involved in a refinance, and it is important to consider the closing costs against whether or not you should refinance your mortgage. There are also specific refinance rules that you should follow. If you are having a difficult time paying your mortgage, refinancing may be able to help by lowering your monthly payment. A refinance can save you money, lower your monthly payments, and free up room in your budget.

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Rule 1: Watch Your Rate and Your Terms

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When you refinance your mortgage you should do it because you qualify for a lower interest rate. You can pre-qualify for a refinance. As with any mortgage before you sign the papers you should be sure that interest rate and terms of the loan are the same as what you were originally quoted. If the rates change, be sure that you are still getting a good deal on the mortgage. Consider looking at different banks to see which one offers the best mortgage terms. Additionally, see if you can get a lower rate for automatic payments. 

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Rule 2: Consider the Length of the Loan

If possible, you should refinance your mortgage so that you do not add additional time to your loan. You can do this by choosing a shorter loan length, which will increase the amount that you would pay compared to a thirty year loan. The longer the term of the loan the more you will pay in interest on the loan. If you refinance to a thirty year loan you will lower your payment, but you will also greatly increase the length of your loan. This will cause you to pay more interest in the long run. If possible refinance to a ten or fifteen year mortgage.

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Rule 3: Don't Draw Equity Out of Your Home

Often when people refinance they do it to draw out the equity of their home. They may use the money for home improvements, to pay off other debt or to finance a wedding or college education. When you pull out the equity you are extending the life of the loan and increasing the amount of interest you will pay. You are cashing out on your investment. If you use the money to pay off credit cards you are putting your home at risk, in the event that you are no longer able to make payments. This is a dangerous step, because many people often find themselves in the same situation in a few years. You may also end up underwater on your mortgage, because of the changing value in home prices. If you draw out the equity, you may end up needing to pay PMI on your home again. If you leave the equity in your home, you are protecting it and your financial future. 

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Rule 4: Don't Refinance to an ARM

If you are refinancing to save money on your mortgage payments be sure that you lock in a low rate instead of going with an adjustable rate mortgage. An adjustable rate mortgage will adjust to a higher interest rate in a few years, which will raise your payment amount. If you do this, you will have to worry about rising interest rates. Locking in the lower rate will save you more money in the long run. Currently rates are very low, and it would be foolish to lose these low rates with an adjustable rate mortgage that will adjust up.

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Rule 5: Be Sure the Terms Are More Favorable with Your New Loan

In addition to looking at the interest rate and length of the loan, you need to read the fine print carefully and make sure that terms are acceptable and favorable. Find out what happens if you are late for a payment. Different companies may enact different penalties including late fees or an increase in your interest rate. Find out how long you have before your home goes into foreclosure. Also find out if there are prepayment penalties. Some lenders will not allow you to pay off the loan early for a set number of years or they may not credit extra payments to the principle amount of the loan. It is important to look at all of these things before you refinance. It also helps to have more than one offer to consider to make sure that the terms are favorable to you.

Also be sure that you are not having PMI or other insurance options added onto you mortgage if you do not owe more than eighty percent of the value of your home. Some mortgage companies will require or add these in and drive up your mortgage payment with the cost of these unnecessary services.