5 ways to think ahead about refinancing

Want to take advantage of low rates? These tips can ensure you're prepared.

By MSN Real Estate partner Aug 15, 2014 9:59AM

alexskopje/Getty ImagesBy Richard Barrington, ShopRate

 

You can't control mortgage rates.

 

That simple fact can give refinancing something of a lottery feel -- some mortgage borrowers are lucky enough to get the opportunity to refinance, while others are stuck with the same rate for the entire life of their mortgages.

 

Still, while there is an element of luck in the movement of refinance rates, there is also some degree of planning that determines who can refinance. This is because the movement of refinance rates is just one factor that determines whether you will get a chance to refinance. There are a number of other things that have to line up, as well.

 

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Making sure everything lines up when the time comes requires thinking ahead -- beginning from when you choose your initial mortgage. Here are some of the ways thinking ahead can help you be ready to refinance if rates give you the opportunity:

  1. Make a significant down payment. To get the most competitive mortgage terms these days, you are likely to need a 20 percent down payment. If that seems like a burden, keep in mind that a large down payment also puts you in a better position to refinance later on. A bigger down payment gives you a healthy equity cushion, leaving you less chance of finding your loan under water due to price fluctuations.
  2. Watch out for prepayment penalties. When choosing your initial mortgage, pay attention to any penalties for early repayment of the loan. These penalties often diminish over time, but a steep enough penalty could preclude you from refinancing in the early years of the loan. Remember, the opportunity might not come up more than once; and in any case, the sooner you refinance the more you can save, so even a penalty that applies over the first few years could turn out to be an important obstacle.
  3. Keep your credit in shape. Just because you have your mortgage does not mean you can become careless about your credit usage. If you want to refinance, chances are you will have to qualify all over again, especially if you want access to the best mortgage rates.
  4. Keep your home in shape. Just as with a purchase mortgage, refinance lenders are going to want an equity cushion between the value of your home and the amount you are borrowing. So it is important not to allow the value of your home to deteriorate because of damage or poor maintenance.
  5. Focus on the right target. When you track rates to see if refinancing makes sense, be sure you are looking at the right types of mortgage. If you started with a 30-year loan, you should probably focus on 30-year refinance rates initially, but after several years of principal payments refinancing to a 15-year loan might be a better fit. In the last 10 years of the loan, a short-term adjustable-rate loan might even make sense.

The irony about refinancing is that the best situation is never to have refinance rates go low enough for refinancing to make sense -- that would mean you had been getting the lowest mortgage rate possible all along. Thinking ahead can help in this respect too, by buying when rates are low and comparing mortgage rates to get the best deal right from the start.

 

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Tags: loans
 
4Comments
Aug 16, 2014 9:03AM
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The trouble with foreclosed homes are the banks or the fed gov. who ever has ownership thru forecloser, they let houses set for many months and even years before sold WHY? . I tried to buy a house that was listed with a realtor and the owner was letting it go at what he owed on the property very simple deal EXCEPT the BANK would only take offers for the next two or three months and take the best offer, NOW who the heck is going to wait that long and may or may not get to buy it? I was going to take over the payments and that way the bank does not lose a penny and the owner does not have forecloser on his head, No the bank would not accept that, 9 months later I get a phone call from the bank asking me if I was still interested in that house ! they would let me take over payment at the same offer that I gave them earlier only now the price would be $10,000. less and the owner would eat the rest. I told them I already have my home and it only took a few weeks to get it done. We went by the house the next day and it was a mess one window broken ,looked like someone had been using it for a crack house and it smelled like chemicals.  it's to bad this house was a very well kept home but the owners had to give it up because of illness in the family & a death. THE BANK is at fault here and how many other houses are in the same situation Bank managers trying to screw who ever they can to make their books look good?. The fed's. should pass a law that the bank must take the first reasonable offer that comes in. this would stop a vacant house from becoming a crack house and the fed's would not bail the bank out by taking over the debt.
Aug 16, 2014 5:19AM
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Prior to the mid1980's, equity loans or refinancing would not allow an owner to borrow more than 80% of an appraised value. Back then responsible lending guidelines reflected the fact that borrowing down payment  funds or all the equity did nothing more then provide an incentive to walk away from a home loan. Nearly every foreclosure involves no borrower equity. That usually consists of a combination of home value decline and little or no down payment. Today, lenders don't care about  foreclosure risks as they sell these stinker loans to the Gov't. So we as tax payers get stuck with more bad loans and foreclosed houses.
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