Tracking Down the Best Home Refinance

by David Sandberg

Finding the best mortgage to refinance your home is a process that requires three steps. First, you have to find lenders that will work with your particular situation. Second, look among those lenders for the ones with the lowest interest rates. Finally, take a look at all of the costs and fees that they charge to find the lowest total cost. Given today’s historically low interest rates, it is worth your effort to complete this process.

Finding a Lender that Will Work With You

In today’s market, the greatest challenge is going to be finding a lender that will work with you. If you have stable employment, monthly gross income of at least four times your mortgage payment, and a credit score in the 700’s, most lenders will be willing to extend a mortgage to you. If you are not in this situation, you will find it much harder to

Traditional mortgages require you to have at least 20 percent equity in your home. This means that if you need to take out a $200,000 refinance, your home must be worth at least $250,000 in today’s market. If your home does not need this standard, you may need to find a lender that can do a refinance for higher levels of debt, such as a FHA or, if you are a veteran, VA lender. These lenders use special government programs to allow people to borrow more money against their homes.

Finally, your refinance options will be limited if your mortgage balance falls above the “conforming loan” limit. The conforming loan limit is the largest size loan that Fannie Mae and Freddie Mac will buy. Having them “buy” the loan ultimately allows lenders to offer lower rates. If your loan is above the limit, which is between $417,000 and $625,500 for the 2012 calendar year in the Continental United States, you will need to source a “jumbo” mortgage. These mortgages typically cost more.

Choosing the Lowest Rate and Costs

Once you have identified a group of lenders that will work with you, you can begin to compare the rate and cost of the loan. The first step is to always compare apples to apples. In other words, if you are looking at a 30-year fixed rate mortgage from one firm, make sure that every loan that you compare to it is also a 30-year fixed rate mortgage. Shorter-term mortgages and adjustable mortgages are usually cheaper, and will appear more attractive.

The next step is to be clear about which rate you are comparing. Which loan is cheaper — the one with a 4.10 percent interest rate or the one with a 4.25 percent interest rate? Most people would take the first loan on the basis of the interest rate. However, the interest rate does not tell the entire story of what a loan costs. Loans can carry significant costs that either have to be paid in cash at closing or get added to the loan’s balance, increasing the payment.

To make an accurate comparison, ask your lenders about the loan’s APR. The APR, or annual percentage rate, is an interest rate that includes the impact of any additional costs. Generally speaking, the loan with the lowest APR is going to be your best deal, especially if your intent is to pay it off.

Options

Everyone’s situation is different. For most people, a 30-year fixed rate refinance with the lowest APR represents the best deal. However, if you are absolutely sure that you will be moving in a relatively short period of time, an adjustable rate mortgage (ARM) with an initial fixed term of five or seven years could save you money. On the other hand, if you would like to pay your house off sooner, a 15-year or 20-year fixed rate mortgage could get you mortgage-free in less time. Given the amount of money that you could save by refinancing an older, high-rate loan, a short mortgage could be a great way to build personal wealth.

Finding the right home refinance is ultimately all about you. What you have to offer a lender determines what they can offer you. What you need from the lender will determine which loan you take from them.

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