Mortgage Refinancing Starter Kit
With mortgage rates still so low, millions of homeowners have decided to refinance in order to trim their housing costs. But knowing when and how to refinance is a much more difficult decision than deciding you want a lower monthly payment. This refinance package will help you decide whether a refinance is right for you, what steps you should take to prepare for your refinance and how to choose the right lender, product and term.
Stage 1: DECIDE
Deciding if you should refinance
The decision to refinance your mortgage always depends on your personal and financial situation. This chapter discusses the multitude of factors you need to consider to decide if a refinance is right for you.
Tools and Resources:
Stage 2: PREPARE
Preparing for your refinance
Once you've made the decision to refinance, it’s time to prepare your finances. That means raising your credit score and compiling all the documentation required to refinance a mortgage in today’s demanding marketplace. This chapter offers tips for boosting your credit score, gathering paperwork and documentation in order to avoid any last-minute snags.
Tools and Resources:
Stage 3: CHOOSE
Choosing a lender
The most important aspect of refinancing is choosing the right refinance. Is a refinance that saves you over $100 a month worth it if it’s costing you thousands over the life of your loan? What if your refinance actually increases your monthly payment? This chapter will help you understand what to look for in a lender or mortgage broker, how to pick the proper product and term, as well as how to compare and lock in the best refinance mortgage rates.
Tools and Resources:
Tools for decision-making
Refinancing your home loan is all about the bottom line: What’s it going to cost and does it make financial sense for you? Here are a number of tools and resources to help you calculate the cost of your refinance over the short and long term. Or, if you’re not ready to refinance this moment, we offer a number of data-driven resources to help you track and compare the latest mortgage rates.
Tools and Resources:
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|Refinance Top Stories||Refinance Q&A: Ask Our Expert|
Q: Are car loan payments calculated differently than mortgage payments?
A: Monthly payments for some auto loans may not be calculated the same way a mortgage loan is.
For mortgages, the process of amortization is essentially a compounding method. A good way to think about mortgage amortization is that you don't have one single loan, but rather individual loans with terms of 360 months, then one for 359 months, then one for 358 months and so on, all strung together.
Each month sees a payment calculated with a smaller loan balance over the new shorter term, and while the total of the payment remains the same, the amount of interest you pay in a given month decreases while the amount of principal you pay increases.
This is a process known as "amortization." To determine your monthly mortgage payment over the life of your loan, be sure to check out our mortgage calculator.
On the other hand, installment loans--like a car loan--can either be:
- "Simple interest add-on" or
- "Simple interest amortizing"
Simple interest add-on loans: These are actually written as a single loan; all of the interest that will be due is calculated up front, added to the total of the loan as a finance charge, then that sum is divided over the number of months in the term to arrive at your monthly payment. Each payment consists of exactly the same amount of principal and interest, and as such, there's no savings to be had from prepaying these kinds of loans early.
Simple interest amortizing loans: These work like a mortgage, with a declining loan balance and declining term producing a constant monthly payment with changing compositions of principal and interest. Prepaying these can save you some money.
A loan to avoid
There can also still be loans based upon a thing called the "Rule of 78."
These are simple interest add-on loans with a twist; they are structured to have you pay the interest due on the loan first, then once that's done, your payments will cover the principal.
These should be avoided, since you end up "renting" money during the early years of the loan while your principal doesn't decline. If you should hold the loan to term, there is no difference in total cost when compared to a standard simple interest add-on loan, but if you should need to pay the loan off early, you'll find that you'll still owe most -- if not all -- of the original loan you took despite having made payments for some period of time.
Depending upon your kind of loan, you'll be able to use a standard amortization calculator... or not. Check your loan contract for details; if it is a "simple interest add-on" type, do a Google search for "simple interest calculator" and you should be able to find what you need.
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.