Mortgage Refinancing Starter Kit
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Introduction
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
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
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
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
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 |
Q: I have three years remaining on a 15-year loan with a 6 percent fixed rate. I would like a lower rate. Please advise which would be the best option. Thank you.
A: Refinancing can be a situation of diminishing returns after you reach a certain point of your mortgage. In your case, you note that have only three years remaining of an original 15 year term. With a $100,000 original loan amount at the 6 percent rate you cite, you were slated to spend about $52,000 in interest over the 15-year period. But now that you're starting year 13, you have already paid some $49,000 of interest, with only $3,000 left to go.
Certainly, you can get a lower interest rate if you refinance. However, your remaining loan balance is only about $27,000 (given the $100,000 example above), and few lenders will touch such a small loan. There's just as much paperwork for a small loan as a $400,000 loan, but a lot less interest to be made. Even if you do find a lender who will take on your loan, you'll be charged a premium on the interest rate or fees, which will eat up some of any savings you might be able to obtain. With only $3,000 left in interest cost, it will be nearly impossible to save any money once the refinance costs are paid, and even then, you'll need to obtain the shortest loan term you can and prepay the loan just to keep from increasing your costs over time.
For example, if you could obtain a 3 percent rate on a 10-year term, your $27,000 loan balance would see you spend about $4,200 in interest over the next 10 years, about $1,200 more than you presently owe, plus you'll have fees to pay on top. If you want to prepay the loan so the term isn't extended, preserving the savings of the lower interest rate, you'll need to prepay it at a rate of $500 per month. Doing so would lower the interest cost to $1,300, so you'll save $1,700 in interest, but still have the fees to obtain the loan to consider. The net benefit after all this work might be measured in only hundreds of dollars.
In short, technically yes, it can be done, but the benefits are so slight as to raise the question: "Why bother?"
You can run your particular numbers through our mortgage calculator to see for yourself.
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.
