Getting the best mortgage refinance deal takes calculation and careful planning. Because of stricter lending standards, prepare yourself for a more thorough loan application process. Whether your purpose for refinancing is to get lower monthly payments or utilize extra cash generated by the equity in your home, it’s important to choose a refinance option that fits your needs. No matter what your reason for refinancing, you want to make an informed decision that will cost you less money over the term of the loan.
Check your credit standing. This is always the first step you should take before shopping for any type of loan. The Federal Deposit Insurance Corporation (FDIC) recommends explaining to lenders if negative information contained on your credit report is due to an extended illness or a temporary loss of income. You may still qualify for a low interest rate if you give the lender adequate reason to trust you to repay the loan.
Organize your paperwork before you start contacting lenders. Gather together financial records from the last three years to cover yourself. Generally, be prepared to show pay stubs from the last month, bank statements from the last two months and tax returns from the last two years as proof of your assets and monthly household income.
Talk to your current lender before inquiring elsewhere about a loan. Many lenders offer established customers a better rate to keep their business. If you aren’t happy with the offer you receive, don’t be afraid to negotiate or else shop for a better rate. Inquire about refinance loans at several other banks, credit unions and mortgage companies. Look into the interest rates offered by mortgage brokers and online banks as well. Whether a lender is a brick-and-mortar financial institution or operates online, make sure that the lender is FDIC insured.
Request information about a low fixed rate refinance loan. Even if a lender offers you a lower variable interest rate loan to begin, that rate can increase over the years, costing you significantly more in monthly payments. Interest rates tend to rise with the rate of inflation.
Ask for a breakdown of the closing costs. When applying for a refinance loan, the law requires that the lender provide you with a good faith estimate. Check to see if the closing costs include an origination fee, which is actually prepaid interest. Pay discount points at closing and you can reduce your interest rate more. One point usually averages about 1 percent of the loan amount, lowering your interest rate by 0.25 percentage points. However, in some cases, it can lower the interest rate you pay by nearly a full percentage point.
Lock in a rate you find that you can afford. This allows you to protect yourself if interest rates rise before you close on your loan. The lender will charge you a fee to lock in the rate, but paying the added 0.25 percentage points could be to your advantage.
Inquire about a float down option in the event that interest rates drop more while your loan is being processed. You will probably have to pay a nonrefundable fee of $200 or $300, but the investment is worth it if it saves you thousands of dollars over the time of the loan.
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