If you read my last article, you know I just went through the process of refinancing my mortgage. Over the years, I know people who have stayed away from this exercise because they think it will be too much work. I’ve refinances no less than 6 times and with little effort. The results were always lower long term interest rates and monthly savings. So well worth the effort.
Here’s what you need to keep in mind:
1. Fixed vs. Variable rates
You know this. But these days you are seeing the term fixed used in connection with variable. The ads will say fixed with an asterisk (*). This means fixed for a set number of years, and then it’s variable again. Typically fixed for five years. So if you know for certain that you will be in your home less than 5 years, this may be a good deal. If not, you’re taking the chance on the upside.
Also the rates are higher for fixed vs. variable. So as I always say…do the math and see what works for you.
2. Closing costs
Closing costs vary greatly from one provider to another. Keep in mind that there is a lot they can to reduce your closing costs – especially if you are refinancing with a current provider. What you need to be very careful of, is the offer to roll your closing costs into the new balance of your loan. This means you will be financing $2000 in closing costs over the 30 years of your mortgage. This is not a good move. Look at the closing costs and see how many months in savings it will take to pay that back. Simple math. If you save $100 a month and have $2000 in closing costs, it will take you 20 months to break even.
Most people have 30 year fixed mortgages, but there are options. If you’ve had your mortgage for a number of years and have not refinanced, you may be able to finance for a shorter term for the same monthly payment. Some people don’t know that most providers offer 30, 20, 15 and shorter term mortgages. The shorter the term, the higher the payments. If you have a rate in the 6% range and can refi into the 4% range you may save enough to sign up for a shorter term and save in the long run.
4. Who do I call?
Your best bet is most likely to be your current provider. If you are a good customer, they will want to keep your business. But before you do this, shop around. Call other Financial Institutions;look at online providers; see what’s out there. This will tell you what is a good deal or something just OK. As with every purchase – and this is a purchase – research and knowledge are key to making sure you get the best deal, but also to your ability to negotiate and understand your options.
5. Pull the trigger
I have spoken to friends who have been talking about refinancing for months. Yet they haven’t done the research, haven’t called their provider, and thus haven’t given themselves to save any money. In the end the biggest decision you will make is to actually make the decision to move forward. Start with the research and just keep taking the next step until you have the deal you want.