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     Your interest rate can increase if the amount financed exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. The conforming loan limit changes at the beginning of each year.

     Shorter loans, such as 20 year or 15 year note, can save you thousand of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower interest rate than a fixed rate mortgage, but your payments could get higher when the interest rate changes.

     A larger down payment - greater than 20% - will give you the best possible rate. Borrowers who put down payments of 5% or less should expect to pay a higher rate as you are starting with less equity as collateral. If you've got the cash now and want to lower your payments, you can pay on your loan to lower your mortgage rate. It's a simple concept, really: In exchange for more money upfront, lenders are willing to lower the interest rate they charge, cutting the borrower's payments. Closing costs that include title, taxes, escrows and lender fees are paid by the borrower. If you don't want to pay all of the closing costs, expect a higher rate which will pay the lender additional interest over the life of the loan.

                           

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     Credit quality and debt-to-income-ratio affect the terms of your loan. If you have good credit and your monthly income far surpasses your monthly debt obligations, you will get approved at a lower interest rate. However, if your monthly income barely covers your minimum debt obligations, even if you have a credit report, you will not receive the lowest available interest rate.

Several Factors Affect Your Mortgage Rate

	Increase	Decrease
Amount of Loan	Rates Up	Rates Down
Length of Loan	Rates Up	Rates Down
Adjustable Rate	Rates Down	Rates Up
Down Payment	Rates Down	Rates Up
Discount Points	Rates Down	Rates Up
Closing Costs	Rates Down	Rates Up
Credit Quality	Rates Down	Rates Up
Income Level	Rates Down	Rates Up
Lock In Period	Rates Up	Rates Down

 

 

Get Your Hands on Some Cash

     Another way to make a refinance work for you is to refinance for more than the balance remaining on your old mortgage -- in effect, tapping your home equity, or "cashing out," in mortgage speak. Thanks to favorable rates, you may be able to do so without boosting your monthly outlay. For example, at 8.5%, the payment on a $200,000, 30-year fixed rate mortgage is $1,538. But at 7.5%, that same payment lets you borrow nearly $20,000 more.

     The best use for the extra cash is to pay off any higher rate loans you may have. Let's say that you are carrying a $15,000 car loan at 10% and making minimum payments on a $10,000 credit card balance at 17%. Your monthly payments on those debts would total $680. Then assume you refinanced your mortgage, taking out an additional $25,000 to pay off your car and credit card loans. Result: At 7.5%, your additional monthly mortgage payment would total only $175, so you would come out $505 ahead ($680-$175=$505).

     Of course, all the extra cash doesn't have to go to paying off debts. When one of our  clients swapped their ARM for a fixed rate last December, they also increased their mortgage load by $34,000, from $106,000 to $140,000. They used

$3,000 of the proceeds to pay their refinancing costs and another $17,000 to pay off a 10% home equity loan, which had been costing them $250 a month. Then they spent the remaining $14,000 to build a garage for their antique car collection -- and they did all this for just another $19 a month.

Mortgage Refinance Costs

     When you refinance your mortgage, you usually pay off your original mortgage and sign a new loan. With a new loan, you again pay most of the same costs you paid to get your original mortgage. These can include settlement costs, discount points, and other fees. You also may be charged a penalty for paying off your original loan early, although some states prohibit this. The total expense for refinancing a mortgage depends on the interest rate, number of points, and other costs required to obtain a loan. To obtain the lowest rate offered, most mortgage companies will charge several points, and the total cost can run between three and six percent of the total amount you borrow. So, for example, on a $100,000 mortgage, the company might charge you between $3,000 and $6,000. However, some companies may offer zero points at a higher interest rate, which may significantly reduce your initial costs, although your payments may be somewhat higher.

Consider Other Mortgage Programs

     If you are thinking about refinancing your mortgage, you might want to consider other types of mortgages. For example, you might want to look into a 15-year fixed rate mortgage. In this plan, your mortgage payments are somewhat higher than a longer-term loan, but you pay substantially less interest over the life of the loan and build equity more quickly. (Of course, this also means you have less interest to deduct on your income tax return.)

     You also might want to consider refinancing if you have an adjustable rate mortgage with high or no limits on interest rate increases. You might want to switch to a fixed rate mortgage or to an adjustable rate mortgage that limits changes in the rate at each adjustment date as well as over the life of the loan.

     If you decide to apply for refinancing with a particular mortgage company, and if you do not want to let the interest rate "float" until closing, get a written statement to guarantee the interest rate and the number of discount points that you will pay at closing. This binding commitment or "lock in" ensures that the mortgage company will not raise these costs even if rates increase before you settle on the new loan. You also may consider requesting an agreement where the interest rate can decrease but not increase before closing. If you cannot get the mortgage company to put this information in writing, you may wish to choose one that will provide this important information.

Build Home Equity Faster

     Many borrowers use a refinance to shorten the term of the mortgage. And brace yourself, even at low rates, a shorter term means a higher monthly payment. The benefit is that you'll build up equity faster and pay far less in total interest over the life of the loan.

     If you can't afford the payments on a 15-year mortgage, your next best means of building equity is to refinance for less than 30 years. To do so, ask your mortgage company to customize your new loan's term to match the years that are left on your old loan -- if you are five years into a 30-year mortgage, for example, ask for a 25-year loan.

 

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