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Refinance Mortgage Rates: Goals and Benefits

Mar 16, 2008
Refinancing your existing mortgage is much easier than qualifying for the original mortgage on your property. Still, there are a few particulars that a borrower should know before starting this process. When refinance mortgage rates begin to drop, it is important that you wait and watch for a little while. Analyze your present mortgage and decide the benefits and your goals that would be gained by a refinance of your mortgage.

One goal is certain. You should have a low fixed rate mortgage when you finish the refinance process. Any Adjustable Rate Mortgage (ARM) should be refinanced into a fixed rate mortgage as soon as the fixed rates become equal to - or better than - your current ARM payment.

ARMs are generally allowed to borrowers who otherwise would not qualify for any mortgage at all. It is this practice that is the root of many foreclosures, bankruptcies and bad credit scores. The ARMs originated for property owners who planned to sell within three years. Contractors especially like the ARMs because they can renovate a property and sell it in less than one year - sometimes less than six months.

If you already have a fixed rate mortgage, you should look for a mortgage refinance at a lower fixed rate. The lower rate is your goal and the lower monthly payment is the benefit. If your current monthly payments are reasonable and it is clear that you could maintain that same payment with a larger principal balance and a lower fixed rate, then you might consider taking cash from the equity that has built up. However, evaluate your intentions for the cash that you will take. Remember that your home is at stake.

Cash from your equity makes sense if your goal is to pay off bills, remodel some part of your home, pay for college tuition, etc. The benefit is a lower interest rate than a credit card issuer would charge. Credit cardsa generate bills forever, whereas a mortgage loan comes to an end at a specified date. You might even consider the possibility of accelerating the principal payments on the larger loan. That would result in a shorter term of the mortgage and the benefit here is the truckload of savings from the interest that you will not be paying. It is important to lock in the low refinance mortgage rate that you found by comparison shopping among different types of lenders: banks, investment firms, brokers or loan specialists. This will insure that the refinance mortgage rate that you are quoted is the same one that you sign for at the closing.

When you lock your loan rate, you usually are locking all of the terms and the index that accompany it. However, a loan is not locked forever, so the borrower must respond to lender inquiries and requests as quickly as possible. Locking a rate is especially crucial to a borrower whose debt-to-income ratio is somewhat risky. Anyone who is considering a mortgage of any type - initial, refinance, equity loan - should request a rate lock.

There are some other lesser considerations, but these are the ones that every borrower should consider. Make sure you have the terms in writing before you go forward with the loan - for your own peace of mind.
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