Tips on Refinancing a High Interest Rate Mortgage

If you bought your home when interest rates were higher then it is worth considering refinancing to move onto a lower interest rate. There are certain considerations to take into account before you go ahead to ensure it is the most financially sound decision. With the current tighter lending criteria that lenders are applying then it is worth noting that refinancing is no longer the easy option it once was, and not all applicants will qualify.

One of the key areas to consider is the amount of equity which you have in your home. If your home has negative equity you are unlikely to be able to refinance. If your home has less than 20% equity any refinance deal will mean taking out new mortgage protection on the lender’s behalf, and if you can’t afford to pay this as an upfront fee it will be added to the mortgage, thus accruing further interest.

It’s a bad idea to refinance if your mortgage loan is almost paid off, so if there are only a few years left it would be more advisable to stay with your current mortgage. Changing so late in the game can mean extending the term which leaves you paying more overall, with less of your payments going to reduce the principal.

Borrowers with a good level of equity who are not planning to move soon will benefit from refinancing to a lower interest rate. You should calculate how long it will take for the refinancing costs to be covered before you actually benefit. Refinancing can be an expensive business as the costs are comparable to the closing costs you first paid when obtaining your mortgage. You should use an online mortgage calculator to work out how many months it will take to cover the costs of refinancing.

It is a good idea for borrowers to try and negotiate the closing costs down to a minimum; or even better to try and get the lender to assume them. There are a select few lenders who will issue refinancing with no costs attached, but they are dependant on the type of borrower. Only those with excellent credit scores, steady good jobs and good academic qualifications are likely to receive cost free refinancing. It is always worth trying to negotiate the costs down as much as you can, so have a number of viable lenders to play off against one another before you commit to one lender.

If closing costs are a necessity as they are in the majority of cases, it is far better if you can afford to pay them upfront, as opposed to adding them to the balance of the mortgage. If you have to do this then the closing cost fees will accrue interest over the term of the loan, adding extra to the overall costs.

One of the best opportunities to grasp when refinancing is to either shorten the term of your mortgage loan as your payments will be lower. The other wise course is to continue to pay the same monthly payment as before, which will reduce the mortgage principal more quickly and leave you mortgage free sooner.

Try not to be tempted to add to the mortgage borrowing by taking additional cash from the equity, as you will end up paying far more back in the long term, with more interest added. Instead, if you need cash to pay down other debts, use the money saved by having smaller monthly payments, to pay down other debt until it is clear. Then pay this same additional amount towards reducing the mortgage.

Ensure that all the best rates are compared between lenders befor going ahead. If all the indications are good and refinancing makes financial sense the you could end up saving a huge amount of money which is going in unnecessarily high interest payments, and thus end up paying less for the total cost of your home.