If interest rates have fallen or if your credit score is better since you took out your mortgage, you might want to refinance. You may want to refinance to increase the term of your mortgage to reduce your monthly payments or to decrease your mortgage term to pay if off faster, which saves you interest. You might want to switch from an adjustable-rate to a fixed-rate mortgage, or you may want to do a cash-out refi, which means you get the equity you earned in cash by starting the mortgage process all over again from scratch. Before you make the decision to refinance, understand all there is to know.
To refinance, you’ll go through a similar process to when you took out the original mortgage, complete with closing costs. You fill out an application, submit documents required by the lender and sign new loan documents if the lender approves the refinance. You can refinance through your current lender, a mortgage broker, a bank or a credit union. Shop around for the best deal by comparing interest rates and costs. You can compare mortgage rates through Bankrate.com, for example, or by looking in the newspaper. The Federal Reserve says that lenders must give you a “good faith estimate” within three days of receiving your application.
The lender considers your income, debts, credit score, current value of the property and how much you want to borrow. It’s important to get a copy of your credit report through AnnualCreditReport.com to make sure the information is correct before you apply for a refi. Refinancing fees can run you 3 percent to 6 percent of your principal, according to the Federal Reserve. You pay all or some of these costs depending on your situation: an application fee, a loan origination fee, points (which you can negotiate) equal to 1 percent of your loan, an appraisal fee, an inspection fee, an attorney fee, a title search fee and a survey fee. Some lenders also charge a prepayment penalty if you pay off your existing mortgage early.
You may have heard no-cost refinancing advertised. That term isn’t exactly accurate. It’s true that you won’t pay up-front fees, but you will make up for fees in other ways. You might get a higher interest rate over the life of the loan to cover closing costs or you might roll the closing costs into your principal.
Determine whether the refi is going to be worth it by using an online mortgage calculator. You can find one through the National Bureau of Economic Research, for example. Using this tool helps you determine whether you are going to save enough to make the refinance worthwhile.
After the housing crisis of 2008, where the price of homes plummeted, many homeowners found themselves in the position of owing more on their house than what it’s worth. If you are in that position, you may qualify for a government program called the Home Affordable Refinance Program, also called HARP. By going through HARP, you may be able to refinance when you otherwise wouldn’t.
Laura Agadoni has been writing professionally since 1983. Her feature stories on area businesses, human interest and health and fitness appear in her local newspaper. She has also written and edited for a grassroots outreach effort and has been published in "Clean Eating" magazine and in "Dimensions" magazine, a CUNA Mutual publication. Agadoni has a Bachelor of Arts in communications from California State University-Fullerton.