Refinancing Starter Kit
 
 
 
 
 
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Introduction
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With mortgage rates at a 50-year low and Americans looking for ways to cut costs, many homeowners are considering refinancing their home loans. This refinancing package will help you evaluate whether a refinance is right for you, what steps you should take before you refinance and how to choose the right lender.
Stage 1: DECIDE
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Deciding if you should refinance
While rates are low, the decision to refinance your home loan still depends on your particular situation. This chapter will help you make that decision and explain all of the factors you need to weigh as well as offer calculators to help you decide. Tools and Resources:
Stage 2: PREPARE
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Preparing for your refinance
Once you've made the decision to refinance, you'll need to get your credit score and other finances in order. this chapter offers tips for boosting your credit score, getting paperwork together and avoiding any last-minute snags. Tools and Resources:
Stage 3: CHOOSE
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Choosing a lender
The most important aspect of refinancing is choosing the right lender. This chapter will help you understand what to look for in a lender or mortgage broker, compare refinance rates and finally choose a good lender. Tools and Resources:
RESOURCES
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Tools for decision-making
Refinancing your home loan is all about the number: Does it make financial sense for you? Here are a number of tools and data about mortgage rates that can help you. Tools and Resources:
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| Refinance Top Stories | Refinance Q&A: Ask Our Expert |
Question: Eight years ago I refinanced my home loan with a home equity loan because the bank was offering a cheaper interest rate than what I had and no closing costs. I want to sell my home to get out of debt. I need to fix some things before I sell it. How do I get a small home improvement loan without refinancing my loan? I have lots of debt but I also have a lot of equity in my home.
Answer: Provided your home equity loan is the only loan against your home--that is, it is in the first-lien position--you should be able to obtain a second mortgage, or better, a home equity line of credit. Equity lines of credit are usually available with rates just slightly above the prime rate (3.25 percent today) and can provide maximum flexibility for your home improvement projects.
That said, if your income won't support much more debt, you will still have trouble borrowing new money, no matter the loan vehicle you choose. With lenders stung by losses in the downturn, underwriting standards have stiffened considerably. In general, you won't be able to leverage your home beyond about 80 percent of its present value, and your debt load often cannot be greater than 36 percent to about 41 percent of your monthly gross income.
Since home equity products are usually "portfolio" loans (lenders keep them on their books), there can be considerable variability in the rates and terms you might be offered, so you'll want to shop around your market to see what, if anything, can be made available to you.
Should you refinance?
How do you know if you are a good candidate for a home refinance? You might assume that the only reason to refinance is to reduce your monthly mortgage payment. Though that's a compelling reason, there are actually many possible reasons for refinancing.
With a refinance, you can:
- Lower your interest rate to reduce your monthly payments.
- Shorten your loan term to own your home free and clear sooner.
- Refinance from an adjustable-rate mortgage (ARM) or an interest-only loan into a fixed-rate, fully amortized mortgage--perhaps refinance into another ARM.
- Consolidate consumer debt into your mortgage.
- Take out some home equity as cash to pay for major expenditures such as home improvements, medical costs or college tuition.
Are you a candidate for a refinance?
Financial experts used to offer such rules of thumb as "refinance when mortgage rates have fallen 1 or 2 percent below your current rate." But the truth is that refinancing should be an individual decision that fits into your overall financial plan.
One factor that greatly affects your decision to apply for a mortgage refinance should be how long you plan to stay in the property. Closing costs vary, but you might expect to pay 3 to 6 percent of your mortgage balance in closing costs. It can take several years to recoup those costs through the savings generated by a lower mortgage rate.
Of course, there are "no-cost" or "low-cash-out" refinances too--transactions that allow you to roll closing costs into the mortgage rate or loan balance. HSH.com's Tri-Refi mortgage calculator makes it easy to make side-by-side comparisons of different refinancing options. With careful financial analysis of the costs and benefits of the refinance, you can determine what refinance option will be most advantageous for you.
Mortgage options when refinancing
There are many choices for homeowners when refinancing, including fixed-rate and adjustable-rate mortgages at various terms.
While 30-year and 15-year fixed-rate mortgages are the most common, borrowers can also opt for a 10- or 20-year mortgage. Adjustable-rate loans come with a different initial fixed-rate terms, from one to seven or more years before the mortgage rate becomes adjustable. Consult with an experienced mortgage lender to determine which type of loan best meets your financial needs.
In addition to choosing the loan type, consider whether you want to access some of the equity in your home through a cash-out refinance, or consolidate your other debts with a larger mortgage. Both of these scenarios are likely to result in a larger mortgage payment than the one you have currently, even if you are able to lower your interest rate. But for some borrowers, this type of refinance can allow them to pay off high-interest debt or make needed home improvements more quickly.
A mortgage payment calculator can give you an estimate of your monthly payments at different loan amounts and different mortgage rates. Check today's mortgage rates to find a range of realistic numbers to run through your scenarios.
Qualifying for a mortgage refinance
Some homeowners assume that because they have consistently paid their mortgage on time, they will automatically qualify for a new mortgage.
In reality, mortgage lenders qualify homeowners for a refinance under the same guidelines as a purchase mortgage. Just as you did when you first took out your home loan, you'll need to meet credit qualifications and satisfy debt-to-income ratio tests, and the home must be appraised to determine how much equity is in the property.
Mortgage rate forecasts
Homeowners interested in refinancing may want to keep track of predictions for mortgage rates. Though even seasoned economists cannot always accurately predict what will happen with mortgage rates, it's smart shopping to do your homework on the big picture.
Are interest rates trending up or down? How quickly? Do experts predict big changes on the way? What's the pattern for your state's mortgage rates? HSH.com's up-to-date mortgage rate data and mortgage rate forecasts can help you decode all this.
After some initial research into the pros and cons of a refinance, consult with a mortgage lender who can guide you through the final decision on whether this makes sense for you.
