Top 10 tips for loan refinancing

Interest rates are once again falling to irresistible levels, which means two words are on the mind of millions of Americans: loan refinancing. But how do you get the best loan refinancing deal while avoiding some of the loan refinancing traps that plagued so many of the ill-advised refinancers of the housing crisis? Here are 10 ways to make sure you do your loan refinancing right.

Loan Refinancing Tip #1: Find the right rate. This is probably the most common motivation behind loan refinancing. Anyone who has a high fixed-rate mortgage and sees those rates dropping is naturally tempted to switch to a low fixed-rate loan. Or if you have an ARM, you might take advantage of the low interest rates to get a loan refinancing locked in to a low fixed rate for the life of the loan.



Loan Refinancing Tip #2: Determine whether a fixed or adjustable rate works better with your needs. You might want to use loan refinancing to switch from an ARM to a fixed rate to avoid the periodic adjustments on an ARM that could hike it above the fixed rates, not to mention do away with the stress that comes from watching future rate hikes. But you could also decide to get a loan refinancing to switch from a fixed rate to an ARM if you think those rates could keep decreasing, if you can afford to take the risk, and if you don't plan on staying in your home for more than a few years.

Loan Refinancing Tip #3: Consider shorter or longer term loans. Getting a loan refinancing to get a shorter-term loan makes sense if you want to pay off your mortgage sooner and pay less interest in the long run, but you have to be sure you can afford the bigger payments. Or think about getting a longer-term loan refinancing if your current mortgage payments are not affordable for you and you need to decrease the monthly costs.

Loan Refinancing Tip #4: Figure out whether it pays to refinance. Don't get lured just by the lower interest rates. The costs to loan refinancing might cancel that out. You'll have to pay costs equal to maybe 3 to 6% of the loan's principal, and a loan refinancing includes the same fees as a mortgage: appraisal, title search, application fees, etc. The general rule of thumb has been that a loan refinancing isn't worth it unless your rate is at least 1 to 2 percentage points lower or if you don't plan to move within the next five to seven years, but you should crunch the numbers on your personal situation and figure out your breakeven point, using online calculators.

Loan Refinancing Tip #5: Make sure you don't have to pay a prepayment penalty. This is a major obstacle to loan refinancing for many. Some states prohibit or limit mortgage prepayment penalties, so look into your state laws as well as into your mortgage documents. If it's allowed, a prepayment penalty means the lender will charge you a fee for paying off the loan early, so you'll have to factor those charges into your loan refinancing to see if it's still worth it.

Loan Refinancing Tip #6: Shop around, but go first to your existing lender. Your current lender might make a loan refinancing easier, simply because they probably have all your financial information already on file, and might be able to offer you a better deal to retain you. However, don't let that stop you from doing comparison shopping.

Loan Refinancing Tip #7: Make sure your reasons are reasonable. Many cash out on some equity by loan refinancing. It may make sense in limited situations, such as for profitable remodeling, funding college or, after careful consideration, consolidating debt (and vowing not to accumulate more). But if you're getting a loan refinancing just so you can afford a nicer car or take your dream vacation, um, do you remember 2006-2008? Many homeowners have gone down that treacherous loan refinancing road and ended up in the worst trouble of their lives. Don't repeat recent history.

Loan Refinancing Tip #8: Get out of that interest-only loan as soon as possible. If you signed up for one of the deadliest products of the housing crisis, you are probably scrambling for a loan refinancing right about now, to a loan that pays down some of your principal.

Loan Refinancing Tip #9: Research. You know how, when you bought your home, it was all about location, location, location? Well, with loan refinancing, it's all about research, research, research. Do online research on loan refinancing resource sites. Fannie Mae offers a list of resources; Bankrate.com and WalletPop.com provide resources, articles and online calculators.

Loan Refinancing Tip #10: Read the entire contract and all the fine print before signing. After many homeowners in the housing crisis started suffering, they claimed ignorance about the home loans or loan refinancing products they were signing. That excuse no longer flies. Make sure you know exactly what it is you're signing your name -- and possibly the next 15 to 30 years -- to, and don't let anyone rush you or pressure you into signing anything before you're informed and ready.