Choosing a Refinance Mortgage: Follow the B.A.S.I.C.S.

Not sure how to choose a refinance mortgage? The key is to take care of the basics. As a matter of fact, if you attend to the six points below, which spell out the word "BASICS," you will be on your way to getting a refinance mortgage that meets your goals.

  1. B is for Benchmark. A benchmark is a measuring standard used to weigh financial options. When it comes to refinancing, your existing mortgage is the natural benchmark. It is the standard any potential new mortgage has to beat, in a couple of possible ways. If your primary goal in refinancing is to save on interest, then comparing the total expense over the life of a new mortgage with the remaining expense of your existing mortgage measures whether you would save money in the long run. If your primary goal is to lower your monthly payment so that it better fits your budget, then comparing monthly payments between a new and your existing mortgage becomes the benchmark. Note that lowering your monthly payment can be accomplished by lengthening out your mortgage, and yet this move could increase your overall interest expense, so it is important to decide which of these goals you are pursuing before you choose a benchmark.
  2. A is for Annual Percentage Rate (APR). This is a comprehensive rate used for comparing mortgages. It is related to, but different than, the interest rate on the mortgage because it takes into consideration fees, points, and other expenses associated with a loan. This adjustment is important in refinancing because you will already have paid most of those expenses on your existing loan, so your APR will not differ much (if at all) from your interest rate on that mortgage. On a refinance mortgage, though, chances are you will have to pay some expenses to close the loan, and by factoring these into the APR it gives you a handy way of comparing a new loan with your old one. Just be sure to insist that all upfront expenses associated with the new loan are included in the APR calculation.
  3. S is for Stability. Lowering monthly payments and/or reducing your APR are good reasons for refinancing, but they aren't the only reasons. If you have an adjustable-rate mortgage, your payments and interest rates could go up in the future, possibly to the point where your mortgage would become unaffordable. If you want to lock in a stable, predictable level of rates and monthly payments, refinancing to a fixed rate mortgage would accomplish your goal. This refinancing move is especially compelling these days, since mortgage rates are near historical lows and thus potentially have further to rise than to fall.
  4. I is for Insurance. If you were a first-time home buyer when you got your existing mortgage, chances are you had to agree to pay mortgage insurance premiums. Now, if you have a more established credit history and have paid down a significant portion of your loan's principal, you may qualify for a mortgage with lower or no mortgage insurance premiums. For this reason, if you originally got an FHA or other government-supported loan, don't assume you necessarily have to refinance into the same type of mortgage.
  5. C is for Credit Score. As soon as you start thinking about refinancing, you should check your credit score to see if there are any issues to address. Just because you already have a mortgage does not mean you will automatically get approved to refinance, even by the same lender. Also, your credit score can affect the mortgage rate lenders are willing to offer you.
  6. S is for Shop Around. If conditions are right for you to refinance, don't limit yourself to your existing lender or the first lender you see advertising an attractive rate. Do some comparison shopping, and get specific quotes because rates and other terms will vary according to your exact situation. Remember, you are going to be paying off this mortgage for years to come, so the difference between a good deal and a great deal can add up to a lot of money.

Mortgages can seem complex to an intimidating degree. One of the values of breaking the choice of a refinance mortgage down to the basics is to make sure you are not too intimidated to make a decision that could help you save money, better afford to stay in your home, or stabilize your mortgage payments for years to come.

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