ARM or FRM?

When refinancing your mortgage you will have to decide whether to go for a fixed interest rate, a.k.a. a Fixed Rate Mortgage, or to go with an Adjustable Rate Mortgage (ARM).

Adjustable rates usually start out lower than fixed rates. If, however, you plan on being in your home for a long term, you might want to consider the fixed rate loan.

While it might initially start out at a higher rate, it does leave you with the stability of knowing how much your monthly payments will always be for the next 15, 20, 25 years. As well, while it might initially be a bit higher than the ARM rates, eventually the ARM rates might easily surpass the fixed rates, and render your gain a wash.

Check out both, and don't get locked in to one choice until you have evaluated both.

Get the details in writing

When you are getting quotes from various lenders for your new mortgage, make sure to get the details in writing.

They will almost not definitely tell you about anything that might be thought of as being negative, unless you specifically ask about it. For example, if they have a pre-payment penalty, and they probably do, they will not mention it unless you ask.

Ask. If they say there is not, get it in writing.

Does your mortgage have a pre-payment penalty?

When evaluating options of refinancing, don't forget to check out whether your current mortgage has a early payment fee, or a pre-payment penalty.

It very well may. if it does, you need to calculate that amount into the costs of your new loan before you decide it is worth it.

of course this will also depend on why you are refinancing - if you are doing it for the lower interest rate then you should take this into account. if you are doing it for other reasons, this might not be relevant.

bad credit rating

If you have a bad credit rating, you might think you will have a hard time finding a lender to give you a mortgage, or to refinance yours.

You might be right. But if you look around and speak to a a number of brokers, you will probably find some willing to work with you. keep shopping around and don't give it up so easily.

Why refinance my mortgage?

Why would you want to refinance your mortgage?

There might be lots of reasons. Some of the more obvious reasons are to cash in on lower interest rates, better loan terms, lower payments, etc.

A reason you might not have thought of is in an effort to finish paying your mortgage earlier.

How does that work?

Your current mortgage is structured in a certain way with you paying back a certain amount per month, combining interest and principle. At those rates and payments, you are scheduled to finish paying off your mortgage in, say for example, 17 more years.

Now, let's say you want to be over and done with it sooner. You can't just start giving the lender more money each month. It doesnt work like that.

You would refinance the mortgage, taking on larger monthly payments, thereby shortening the length of the loan.

Of course, to do this you better make sure you have enough monthly income to make those higher payments on a regular basis.

Refinancing: Home Loan variety

When looking to refinance your mortgage, make sure you check out all the various Home Loan options.

There are many options of home loans available, and it is not definite that a refinanced mortgage is the way to go. You might get better terms with a different type of loan, be it better interest rates, method of payment schedule or any variety of other factors.

Ask your broker to suggest other types of loans.

Check out other lenders

Which Lender

When researching the options for refinancing, people most commonly go directly to their current lender - the one holding the existing loan - to get their quote and refinance.

There are benefits to refinancing with the current lender. The process is much simpler. They know you and your payment history and record. They already have all your information. They know everything they need to know. If you would switch lenders, you would have to go through all the paperwork from scratch.

The benefit of going to a different lender is that they want your business. They will, almost always, offer you a lower interest rate than what the current lender will offer you.

The current lender knows you are staying with him out of convenience, and therefore they can get away with not offering you the lowest rate.

So when you are in the process of refinancing, shop around. Check out other lenders.

Mortgage Refinancing: Length of stay

Length of Stay

One of the things to consider when thinking about refinancing a mortgage is length of stay.

You have been living in your house for x number of years. Let's say 12 years, for example. Now you want to take advantage of lower interest rates than the rates you are already paying your mortgage at. Or maybe you need money for another purpose and are thinking about taking a loan against the house.

So you have been in the house 12 years already, as per our example, and now you might sign on a mortgage that you will be paying for another 20 years. Do you plan on remaining in the house that long or are you already thinking about moving? If you are thinking of moving, and don't plan to stay in the current house more than another year or two or three, it might not be worth refinancing.

Consider the fees when refinancing

When deciding whether or not to refinance your mortgage, you have a lot of things to take into account.

One of those things is the fees.

It is possible that just looking at the interest rate would make it seem like an obvious decision. "Well, the interest rate you signed in on previously is so high, and has since come down 3 full points". It seems like a no-brainer. You refinance and are set to save tons of money.

That might be true, but you need to find out what types of fees are involved in refinancing. Early payment of the original mortgage might include some hefty fees and even fines, depending on the mortgage.

It is possible that the fines and fees may be great enough that it will balance out the savings of the lower interest rate.

Make sure you include any fees and fines in your equation when trying to make the decision.

Inactive credit cards affect your credit rating

To get good mortgage financing you have to have good credit.

The first way to have good credit is to make sure you always pay your bills on time, at least the minimum payments (such as on your credit card).

Another point that is important for having a good credit rating is to close any inactive credit card accounts.

You would think that because it is inactive it should not make a difference. As long as you don't owe money on it you should be ok. Right? It is logical, but it is wrong. Inactive credit cards affect your credit rating.

Make sure you cancel any inactive accounts. It will improve your credit rating. Even more importantly, it will likely be one of the points that will get you better rates on the loan.

A lousy mortgage broker

I contacted a mortgage broker to help me decide if I should be refinancing my mortgage.

Despite the great difference in interest rates that I am paying, having signed on my mortgage over 11 years ago, and the interest rates being offered today, the broker still told me not to do it. He said they will probably charge me such high fines that the difference will probably not be so great and savings will be minimal - not enough to make it worth going through the hassle of refinancing.

What got my goat is that he didn't even try. He simply said not to bother.

Perhaps he is the expert and just hearing the initial numbers was enough for him to understand the whole situation and offer his opinion. It just looked like he discounted it too fast and dint really consider it seriously.

Refinance. Just do it

Take advantage of low interest rates and refinance your mortgage. The savings can be tremendous.