Five Tips to Get the Best Refinancing Deals

Fears of recession and widening debt crisis in Europe have lowered mortgage rates in the US. In fact, the current 4% rate on the standard 30-year fixed rate mortgage is the lowest in almost 60 years. Needless to say, many homeowners are planning to refinance.

U.S. banks now follow tight lending standards. Gone are the days when anybody could qualify for a mortgage. That said, if you do a little search, finding a lender is still possible provided that you have a credit score of 740 or higher and at least 20 percent equity in your house. Here are 5 tips to get the best refinancing deals:

1. Shop around.

Mortgage interest rates can vary widely, so do some research before selecting a lender. Rates shouldn't be the only criterion. Processing fees, too, can vary between lenders. Contact lenders in your locality and also ask relatives or friends to recommend a lender to you.

2. Think about closing costs.

Today's mortgage rates are pretty low. But if you already have a low rate, you should perhaps skip a refinance because a new loan may carry closing costs amounting to thousands of dollars. So, if you already have a 4.5% mortgage, you probably have no reason to refinance and get a 4% mortgage.

Before getting a refinance, you should think about closing costs. Ideally, you should refinance only when you can get interest rate cut by 0.5% or more. You should also calculate how many months you will take to recover your closing costs.

3. Beware of hidden costs.

All mortgage refinancing options have closing costs even if they claim that there aren't any. You might come across ads that say 'no closing costs'. You will still end up paying costs in one way or another. Closing costs are typically 1% of your principal amount. Lenders can work these costs into your refinancing deals in several ways.

Some lenders, for example, require borrowers to make an upfront payment. You will have to bring a signed check to cover the expenses. The lending institution will tell you how much money you need to pay. By contrast, 'rolled in' closing costs are added to your loan amount. You won't have to make an upfront payment, but you will have to pay slightly higher EMIs throughout the tenure of your loan.

"No cost" refinancing deals do not usually charge any closing fees; however, they have higher interest rates. It is impossible to say if one option is better than another. So the key is choosing a method that will work best for you.

4. Think about 'cash-in' refinancing.

During the property boom, many homeowners refinanced their existing mortgages to get larger loans. Since housing prices were soaring, they had enough equity in their properties. The housing boom, unfortunately, was followed by the housing bust. Now many homeowners are interested in 'cash-in' refinancing. They are swapping their existing mortgages for smaller ones bringing money to the table to make up the difference. These deals are helpful to customers whose home values have plummeted. By getting a smaller loan, they can increase their home's equity. This also allows them to qualify for refinancing.

5. Get a "rate-lock" confirmation.

Now that mortgage rates are ridiculously low, lenders are getting flooded with refinance applications. To protect your interests, you should get a lock-rate confirmation in writing. A "rate lock" sheet confirms the rate you are getting. It also mentions when the rate expires.