Gabe Douek

Editorial Disclosure: The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are the author’s alone.

Refinance 101

Refinancing your mortgage may just be one of the smartest money moves available to you today. After-all, it’s usually the largest bill you have, so it stands to save you the most money- even up to hundreds or more a month. This Refinance 101 guide is designed to help you accomplish just that.

If you’re making mortgage payments and you haven’t considered refinancing, how could you know if you’re getting the lowest rate possible or not?

For the exact same home, paying a lower price is always smart. It’s smart, it’s lucrative, and the drawbacks are effectively zero. So when should you do it?

When To Lower Your Mortgage Payments

  • You Feel Rates Have Dropped: If it’s been a few years or more since your initial purchase, rates may be lower now. That can make a huge difference.
  • You Want To Renovate: Refinancing or using equity to renovate your home can be an amazing way to take on a small amount of capital to make a large increase in your home value. Flippers do it profitably all the time, so why wouldn’t you?
  • Any Reason At All: Look you don’t always need a special reason to save money. Why pay more? It’s always sensible to pocket more of your cash.

How to refinance loans

1. Know Before You Go

Your credit score is what will ultimately determine what new rate you’ll pay and for how long. It pays to know if your score is bad, good, or great going into the process. If it’s really bad, it makes sense to check anyway (you might be surprised), but to also keep level hopes.

2. Figure out how much money you owe.

Your total refinance loan will be based on how much you owe on the house right now, not the original loan or what your home is actually worth. That’s really great, because even if you financed at the exact same rate, financing a lower amount will lower your monthly payment.

3. Get pre-qualified

This is an easy first step, rarely affects your credit score, and is usually extremely quick. If there’s any reason refinancing wouldn’t make sense, this stage can help shed light on the details.

4. Be sure to know when a credit inquiry is “Hard” or “Soft.”

Hard pulls affect your credit directly, are usually reported to you in the mail, and are made very clear through a series of disclosures on the lenders part. It’s basically you saying, “Yes, I really intend to borrow this money.”

Soft pulls do less reduction to your score, and are a great way to tread water while shopping rates.

5. Make the banks compete to keep the rate low.

Finding the lowest rate among banks is a somewhat straightforward process, but should never be overlooked! What shocks most borrowers, is that the difference between 4% and 5% is NOT 1%! That’s because of how compound interest works. So while many are tempted to say “Oh well,  it’s only one or two percent lower…” in reality that is a much greater cost than a mere 1%. Even more shocking is that the difference between 19% and 20% is not only more than 1%, it’s also more than the difference between 4% and 5%!

The short story is when you have a high rate, moving from 9% to 8% can make massive differences in your financial life. It pays to shop.

6. Compare refinance rates

Place them all in a column, and rank them lowest to highest. Start doing more in depth exploration of the lowest rates first. Is there a catch? Is the service good? Do people speak well of the bank in general?

7. “Date” the banks and rates you like

You might think rates are all there is to it, and for the most part this is correct. But the dollars are in the details and not all equal rates are serviced equally. Give the bank a call. Do you like how they handle your business? Are they kind? Is the automated system a joke? Do they outsource their service? These factors do matter when you’re considering a 30 years relationship.

Pros and Cons of Refinancing a Loan

Refinance Loan Pros:

  • More cash in your checking account
  • Less “drainage” of your paycheck every month
  • Potential to pay off the home sooner

Refinance Loan Cons:

  • Transaction costs and fees
  • Potential to temporarily lower your credit score
  • May need to postpone financing of a new vehicle etc

Should YOU Refinance?

Interest rates are changing every day. Your credit score is also changing rapidly. Not to mention, life is changing every day too. Between these three, it can be tough to find the sweet spot sometimes. And timing is everything. Your best bet is to use this link here to do a quick calculation of how much money you might save.

Things like taxes and PMI don’t usually change the total value of your loan, so leave those as zero in the calculator. You can play with those numbers if you want, but your goal here is to just compare old loan value and rate vs new loan value and rate.

If there are some savings, it may make sense to pursue a new loan. Especially considering how those savings add up over 30 years!

Bottom Line

Saving money on a refinance can be an amazing feeling.  The potential financial impact on your life can be massive. More than anything, be thorough in your research, and know your options before signing anywhere.

There’s no way for an article like this to encompass every possible scenario our broad readers might experience, so please consider this a roadmap at best. It almost always pays to consult a professional who can directly address your unique situation.

It’s up to you to do the homework, and the potential rewards could be more than worth it!

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