American Dream

How to Refinance Your Home: Save Money by Updating Your Mortgage

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If you’re looking to lower your monthly mortgage payments, then refinancing your home is an option worth investigating. Depending on your current interest rate, you may be able to save a good amount of money each month. But before you jump at the chance to refinance your home loan, there are several crucial things to consider.

Here are five common questions about how to refinance your home and when to do it:

1. Are Interest Rates at Their Lowest?

It can be tempting to rush into refinancing your mortgage because of dropping interest rates, but you want to try to time it right and catch them at their lowest.

Once you do your research on the current trends, you can gauge whether rates are expected to keep dropping. Then, you can refinance your mortgage whenever you’re going to get the best deal.

2. Do You Have an Adjustable-Rate Mortgage?

If interest rates are low and you have an adjustable-rate mortgage, then switching to a fixed-rate mortgage may lower your current interest rate. This will help give you peace of mind because you’ll know you locked yourself in at a permanent, low-interest rate.

3. Do You Live in a No-Income-Tax State?

If you live in a no-income-tax state, then you will already be experiencing savings that people in states with income tax don’t have access to. This money can be put toward other areas of your life, such as getting the ball rolling on the refinancing process.

4. How Long Will It Take You to Recoup Your Closing Costs?

Homeowners should try to receive the lowest possible interest rate on their mortgage. Refinancing your home loan can be an expensive process, and it’s not something you’ll want to do every time the interest rate drops. Closing costs on a refinance are usually at least a few thousand dollars.

If refinancing will save you $100 a month, then you should break out your calculator and see how long it will take you to “earn” back what you’ll spend on closing costs. This will help you decide if refinancing your home loan is worth the hassle—or if it might actually cost you money.

5. Who Should Handle Your Refinance?

Several home loan lenders are capable of refinancing your mortgage, but you should shop around for the best interest rate instead of solely looking at the lender who currently provides your loan. When comparing home loan lenders, look at how much closing costs are, what the interest rate is, and the hurdles you may have to go through to obtain the loan. In some cases, you may need to get a home appraisal and a title search.

You can find help by contacting your local bank, a credit union, online mortgage lenders, and even home loan government entities.

Learning how to refinance your home could save you a bundle each month, but you should look at each of the factors outlined above before deciding. Because there is an upfront cost attached to the process, it will not always be in your best interest to refinance. As long as you do your homework, though, you’ll be able to make the most prudent choice for your circumstances.

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Michelle Schroeder is an award-winning personal finance blogger. She discusses student loans, budgeting, intentional living, and more, all on her personal finance website. She has appeared on Forbes, WiseBread, Huffington Post, Zillow, Business Insider, Yahoo! Finance, Lifehacker, Lifehack, The Consumerist, US News, Mint.com, Learnvest, BankRate.com, and more. Michelle also has her Finance MBA.