No matter how much you love your house, being stuck with mortgage terms you would like to be rid of makes enjoying your home harder every day. There’s no law that says you have to keep your current mortgage relationship. You have the right to refinance with a different lender, but you need a strategy for dumping your original mortgage holder.
Prioritize Your Goals
Before you start contacting potential lenders, decide what the refinance should accomplish, such as locking in an interest rate by switching from an adjustable-rate mortgage to a fixed-rate mortgage. Your refinance could also result in a lower interest rate. This reduces your monthly payment and long-term interest expense while letting you pay off the principal faster. Refinance with a shorter mortgage term and reduce your principal balance more quickly. A refinance can also lets you free up your home equity and provide hard cash to use for renovations, debts, or major purchases, such as a car.
All mortgage lenders have specific requirements you must meet to be eligible for their loans. Your income and duration of employment are always a factor, along with other indicators of your creditworthiness at the time of your refinance. Lenders will examine your other obligations and the percentage of your income that the refinanced mortgage would use. Each potential lender for your refinance also has caps or maximums for the total loan-to-value ratio, which is an important factor in whether your new loan will accomplish your goals.
Despite a better interest rate or access to your equity, you could wind up losing money on your refinance. Your new lender can charge you points, or a loan origination fee. You might need to get private mortgage insurance, appraisals and inspections. Some refinancing costs are negotiable, and you might be able to wrap some of them into the new loan. However, closing costs and fees that you don’t pay out of pocket add up quickly and drive up your loan balance.
Calculate how long it will take to recoup the expense of refinancing before you make the breakup call to your current lender. Find your contract with the original mortgage holder and read it. It’s important to know if your current mortgage has a prepayment penalty, which can be the equivalent of several monthly payments. Read your latest escrow statement to determine whether you have a shortage that you must clear up or a surplus that you can tap. Refinancing with a different lender when you are behind on mortgage payments is not impossible, but watch out for additional charges, interest and penalties that affect your payoff amount.
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