A mortgage refinance means applying for a new mortgage to replace an existing mortgage on the property. There are many reasons why borrowers decide to refinance their homes. One reason is to reduce mortgage costs with a lower interest rate. Other reasons to refinance may include reducing the risk of an adjustable-rate mortgage by switching to a fixed-rate loan, and liquidating equity into cash (cash-out refinance). A mortgage refinance has the same costs as a mortgage, such as loan application fees, loan origination fees, and appraisal fees that must be taken into consideration. Though homeowners will have to pay these costs upfront, in the long run a refinance with a lower interest rate is likely to save money.

Here are six things to be aware of when refinancing:

1. Make Sure of Your New Interest Rate
Make sure that your new interest rate will save you enough to justify the process of refinancing. It is best to decrease your interest rate by at least .75% to 1%. For example, this will save you about $100 a month on a $150,000 mortgage.

2. Know Your Closing Costs Up Front
By law, closing costs must be disclosed within three days of the loan application. However, there are different methods used to calculate closing costs, and the numbers are only estimates until the details of your specific loan are clear. It is wise to use a worst-case scenario figure and be pleasantly surprised.

3. Be Sure You Fully Understand Your Reason(s) For Refinancing
Some homeowners refinance simply to reduce their interest rate, but you should be aware that simply reducing your interest rate is not always to your advantage. Make sure that the gains from your rate reduction more than cover the related fees. There are also other legitimate reasons to refinance that may not be related to interest rates, including debt consolidation, home improvements, or a major purchase. Some of these choices may offer other financial or personal advantages, such as taking cash out to buy a car. In this example, you may be able to deduct your interest payments on your tax return. Always consult an accountant or tax attorney before making these types of decisions.

4. Beware of "APR" Advertising
APR stands for Annual Percentage Rate. Some lenders use "APR teaser rates" to get your attention, however they may actually end up costing you more. Such rates are often offered with a 30-year mortgage and an accelerated payment plan. Most lenders allow you to select such a plan, if you chose. Know the actual interest rate that you will be paying when comparing mortgages.

5. Beware of the Quality of Service Provided
You want your refinance to be accomplished with as little hassle and in the shortest period of time. Ask your lender for details of their service plan and performance guarantees.

6. Not All Mortgage Brokers are Created Equal
Be sure to ask your lender about all their available loan products, terms and rates. A subtle difference can save or cost you thousands of dollars.


Contributing Source: SonicPoint.com