You can readjust a mortgage by refinancing through your existing lender or by transferring the mortgage to another bank or credit union. Refinancing can only make sense if you get a lower interest rate than what you are currently paying. However, a lower interest rate alone does not guarantee that you will save money. To ensure that the refinancing will pay off, you may want to consider all associated costs.
Check Present Rates
The first step in a refinancing is to check whether lenders offer lower mortgage rates than what you are paying. If all lenders offer rates that are equal to or higher than your current rate, refinancing is not worth the investment as you won't save money. On the other hand, if your present mortgage interest rate exceeds the rates quoted by most or all lenders, it is worth looking more closely at the matter.
Contact Your Exisitng Lender
Once you determine if some lenders offer lower rates than what you are currently paying, you should first get in touch with your existing lender. Refinancing through your present bank or credit union often saves time and effort as it will have most information about you and your house already on record. Your existing lender may also be more motivated to lower your monthly payments, as it has the most to lose from you defaulting on you loan. In some instances, your lender may also lower, or adjust, your payments without going through a conventional refinancing process. With such an adjustment, you can avoid the closing costs associated with a typical refinancing, as well as most paperwork.
Contact New Lenders
If your existing lender offers a higher rate than what other banks advertise, or if your lender is reluctant to refinance your mortgage, you may want to contact other institutions. Prepare all paperwork beforehand, including a document from your employer to verify that you are employed, as well tax returns and a copy of the deed of your property. Do mention that you are contacting multiple lenders and that you are aware of the advertised rates. This will help you get the best rate possible. If the loan officer is overly eager to close the deal on the spot, you may want to slow down the process by asking for a few days to think about the offer and to contact other lenders. Remember that you are signing a multi-year commitment and even a marginal monthly saving is worth a bit more legwork.
Do the Math
Unless your lender agrees to lowering your monthly payments without a formal closing, the re-adjustment will involve closing costs. This can either be a lump sum, such as an upfront payment, or the cost is folded into the mortgage loan and results in higher monthly payments. If it is folded into the monthly payments, the math is simple: If the monthly payment is lower than your current monthly expense, go for it. If, however, you will have to pay upfront, you must ensure that the upfront payment justifies the lower monthly expenses going forward. If, for example, you will pay $1,000 when you sign the papers and save $20 per month, the refinancing will take 50 months to pay off. If you have less time than that remaining on your mortgage, you will not save any money by refinancing.
Fill Out the Application
Once you find the lowest rate and determine that the refinancing makes sense, fill out the loan application form. After that, the lender will contact with the closing documents. Once you sign the closing documents, the loan is official. If this is a new lender, your relationship with your previous lender will hereby terminate and you will be obliged to make payments to this new institution.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.