Know Your Refinance Goals Up Front

Summary

Before you refinance make sure you know exactly what your goals are.

Being prepared can save you thousands or tens of thousands of dollars over time.

Refinance Purpose

Borrowers usually refinance to either get a lower payment, cash out their equity, or both.

Understanding your loan options in this scenario is the first thing you should do.

Loan Options

There are many different loan options available to you.

Loans range from 30 year fixed loans to interest only loans to minimum payment loans.

Usually a 30 year fixed mortgage has the highest interest rate of all the available loans.

In general, the longer you fix your loan the higher your interest rate will be. A higher interest rate translates into a higher monthly payment.

Lowering Your Payment

If you have an increase in the value of your property you may be able to use your additional equity as leverage to lower your monthly payment.

For example, you may have purchased a $300,000 home with 100% financing in 2004. The property in 2006 may be worth $350,000. This means you now have $50,000 in equity in the property.

The more equity you have in a property the lower your interest rate can be on a mortgage. This is because mortgage lenders perceive your loan to be less risky. If you stop making payments they can seize the house and pay off the mortgage because there is a lot of equity in the property. They are likely to get their money back.

If you have little or no equity you represent a higher risk to the lender.

Cashing Out

When you are cashing out the mortgage lender may decide to pay off some of your credit lines. This may include credit cards, car loans, student loans, etc.

Some lenders will make this a requirement for loan approval.

The mortgage lender will often require the escrow company to directly pay off your creditors from the proceeds of a refinance. In this way they can make sure the debt is paid off.

If you have loans you have co-signed on with someone else the mortgage lender may require that this be paid off as part of your refinance.