Mortgage Refinancing 101: The Basics of Refinancing Your Home Loan

If you are considering mortgage refinancing to lower your monthly payment or cash out equity in your home, doing your homework and researching mortgage lenders and their offers will help save you money on the new loan. Many homeowners don't know where to get started when it comes to mortgage refinancing; if his describes you, familiarizing yourself with mortgage refinancing terminology will get you started on the right foot. Here are the basic terms associated with mortgage refinancing to help get you started.

Mortgage Refinancing Discount and Origination Points

When comparing loan offers you'll hear a lot of talk about points. Points come in two flavors: origination points you pay the person or company that "originates" your loan, and discount points you pay in exchange for more favorable interest rates or loan terms. How much is a point? One point equals 1% of the amount you borrow. Depending on the type of loan you are applying for and the state of your credit you can expect to pay anywhere from 1-3 points. Not every lender requires points and you may be able to use points as a bargaining chip to receive a more favorable loan when negotiating with your lender.

Mortgage Refinancing Interest Rates

Interest rates are the charges you pay in order to finance your mortgage. Interest rates come in two varieties: you can choose a fixed rate loan that never changes or an adjustable interest rate that changes at regular intervals specified in your loan contract. Each type of interest rate has advantages and disadvantages depending on your financial situation. If you need a fixed payment amount that does not change over time in order to budget your finances, a fixed interest rate loan would be best for you. You will pay a rate for a fixed interest rate loan than an adjustable rate mortgage; however, you will have less risk and the ability to plan your budget around the loan.

Adjustable rate mortgage loans come with lower interest rates than the same loan with a fixed interest rate. These loans have lower interest rates initially because they come with an introductory rate. This introductory rate only lasts for a period of time specified in the loan contract. When the introductory period expires, the lender will adjust the loan to the actual interest rate and your payment amount will go up.

Mortgage Refinancing Closing Costs

Once you have been approved for the mortgage loan you will be required to pay closing costs to receive the new loan. Closing costs vary widely from one lender to the next so it pays to include closing costs in your comparison shopping. Many lenders offer the option of financing your closing costs with the loan. This is a very expensive option that you should avoid if possible. The amount of interest you will pay over the duration of the loan greatly outweighs any advantage you gain from financing these closing costs.

You can learn more about your mortgage refinancing options, including common mistakes to avoid by registering for a free mortgage refinancing guidebook.

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