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Interest rates are at a historic low. If you purchased your home several years ago at a higher interest rate this is the time to look at your refinancing options. Refinancing doesn’t make sense in all circumstances however. Our checklist below will help you determine whether or not you’re a good candidate for a refinance.

The Equity Question
First, you need to determine if you have equity in your home or if you’re in an underwater situation. You can use sites like Zillow to determine whether or not your home is worth more than what you paid for it. Most banks will refinance up to 100% of the home’s value and some will go as high as 125%.

How Much Can You Save?
The cost savings in interest rates can be astounding. For the sake of this example, let’s assume a $250,000 mortgage at a fixed rate for 30 years. At 7% payments would be $1663 and the total interest you would pay over the life of the loan would be $348,000. At 4% payments would be $1193 and total interest payments would be $179,000. That 3% difference makes a $470 a month difference in payment and you save $169,000 in interest!

Costs and Break Even Timeline
Banks make money on mortgages in two ways. The first is the interest you pay on the loan. The second is the fees that you pay when you take out a loan. These fees can be called a number of things – points, loan origination fees and document fees. Before you decide whether or not to refinance you need to investigate what likely refinance costs will be.

If you prefer to work with a local lender, credit unions generally offer the best rates and lower fees. Make a few phone calls to determine what local closing costs would likely be. Then compare local rates and closing costs to what is being offered online.

Once you know how much it will cost in fees, you can determine how long the savings you’ll receive with the lower interest rates will take to pay off the costs you’ve incurred to refinance. If you plan on being in your home for a long period of time it usually makes a lot of sense. If you tend to move every few years however it may not make sense. Even if the costs involved do take a long period of time to break even on, it can still make sense to refinance if you need a lower monthly payment.

There are also a large number of homeowners who find themselves in a situation where they do not have enough equity to qualify. In that situation the only thing you can do is work to build equity and hope the interest rates stay low long enough for you to take advantage of them.

With interest rates in the low 4’s, chances are it will make financial sense for you to refinance. Rates can’t get much lower – take some time to talk with your lender to investigate whether you can save hundreds each month and thousands over the life of your loan.

A home is likely the biggest purchase you will ever make. When you shop for a mortgage it is crucial that you take a few simple steps to avoid making huge mistakes that can cost you thousands of dollars. Here we present 5 of the biggest mistakes that can be made and how to avoid them.

Mistake # 1 – Not Checking Your Credit Report
Credit reports frequently have errors. Those errors can bring your credit score down and will result in you qualifying for a mortgage at higher interest rates. It may not seem like it would make a big difference, but a 1% increase from 4% to 5% on a 250,000 mortgage can increase the total interest you’ll pay by over $50,000!

Mistake #2 – Not Comparing Rates and Fees
Just because your local bank claims to have great rates and fees doesn’t mean that they really do. If you were to buy a car you’d likely visit a few dealerships before making a decision. You need to do the same thing, only more so, with a mortgage loan. Check with a few local banks and credit unions and keep track of what they charge for interest rates and fees. Then compare those quotes to what you can find being offered online. Be sure to factor in all the fees when doing comparisons. Sometimes a lender will offer a low interest rate but the closing costs are substantially more. When you compare, be sure it’s apples to apples. A little research now can add up to big savings later.

Mistake #3 – Spending Too Much
Just because you can qualify for a $350,000 mortgage doesn’t mean that you should buy a home that is that expensive. Take a close look at your financial picture and decide how much of a payment you’d be comfortable with. The last thing you want to do is get overextended.

Mistake #4 – Not Having a Rainy Day Fund
Do not put all of your savings into the purchase of your home. It’s important to have some savings available for emergencies. Ask yourself how you would manage the mortgage payment if you were to lose your job. Do you have enough to meet monthly expenses for a few months while you search for another position?

Mistake #5 – Not Getting Pre Approved
Getting pre-approved is easy and it will substantially speed up the process of closing once you decide on a home. The other thing that the pre-approval process will do is ensure that you can really qualify for a home loan. Many times banks say that they can get you approved, but when it comes down to reviewing all the paperwork they determine that they don’t actually have a program that will fit your profile. Take the time to get pre-approved, it’s well worth the investment

Buying a home can be stressful. You can reduce the stress substantially by avoiding the 5 mistakes we’ve outlined above. If you do some homework at the beginning and take the time to shop around you’ll end up saving time and huge amounts of money in the long run.