Mortgage Refinancing Starter Kit
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.
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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.
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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.
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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.
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Q: What’s the best way to pay for my mortgage closing costs?
A: There's no one best way to cover the legitimate fees you'll encounter when getting a mortgage, and they can be substantial. Generally, there are three ways to approach the issue. Each of these three options has different effects on your mortgage cost over time:
- Pay them out-of-pocket today. Paying them today brings the lowest interest rate but the highest initial expense.
- Add them to the loan amount (provided you have a sufficient down payment). Adding them to the loan amount brings higher total costs over time.
- Trade them off for a slightly higher interest rate. Trading them for a higher rate also means higher total costs over the long term.
It should be noted that most borrowers don't have all three choices available, but usually at least two can be found in the market. How much a choice will cost or save you also depends upon how long you hold onto the loan.
Since there's a lot of math to be done to see those cost effects over time, HSH.com has developed a great calculator which shows homebuyers how to pay closing costs.
(For refinancing homeowners wrestling with how to best finance your refinance, HSH.com’s Tri-Refi Refinance Calculator is the proper tool.)
What works best in your situation will depend upon your cash position, whether those funds would be better used to make a larger down payment (possibly avoiding mortgage insurance), or held for reserves in case of emergency.
Even if you can pay the costs out-of-pocket today, it may be better over your time horizon to finance them--doing so may cost you less over your time frame.
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.