If you’ve decided the time is right to refinance your mortgage, you’ll want to proceed wisely to make sure you secure the best loan possible – and meet the goals you’ve set for refinancing.
Refinancing involves paying off your current mortgage and creating a new one. So, the steps you take will be familiar, as will the loan terms offered.
Check Your Credit Score
Your first task is to review your credit report and credit score. You surely don’t want potential lenders finding any surprises that could affect securing a new mortgage. Plus, your credit score directly determines your interest rate, with the lowest rates earned by those with scores of 760 and above. Mortgage lenders often pull your score from all three reporting bureaus – Experian, TransUnion and Equifax – so you should, too.
Figure Out Why You’re Refinancing
Most homeowners refinance to meet a specific goal. If you’re considering refinancing, you likely want to lower your monthly mortgage payment, take cash out of your home, consolidate debt or secure a loan with better terms.
Your monthly payment will be less if interest rates have fallen since you took out your current mortgage, or if you qualify for a lower interest rate because you’ve improved your credit score. You can also lower your monthly payment by lengthening your loan term. But keep in mind that if you’re 10 years into a 30-year loan and making progress on principal, refinancing into another 30-year loan puts you back where you started 10 years ago with primarily interest-only payments.
If your down payment was large, or if you made extra payments on your principal, had a short-term mortgage originally or increased your home’s value through an improvement, you may have equity you can take out in cash when you refinance. Although this money could be useful for other purposes, such as home improvements or your child’s college education, taking cash out makes the balance of your refinanced mortgage higher than your current mortgage. Your monthly payment will likely be more, too, unless your interest rate is significantly lower. Many homeowners find a home equity loan or a home equity line of credit more favorable than taking cash out – and owning less of their home.
Refinancing can also help you out of an adjustable-rate mortgage (ARM) or dual loan. If you currently have a first and second mortgage, such as a home equity loan, you may be able to consolidate the two into one mortgage – and one payment. And while ARMs offer a low monthly payment, you may want to refinance before yours adjusts to a new rate that’s difficult to afford. You can refinance into another ARM or a fixed-rate mortgage, which offers consistent payments for the duration of the loan.
Find A Lender
There are thousands of mortgage lenders to choose from, but the best place to start is with your current mortgage holder. You may be able to avoid some of the costs of refinancing if your current loan is only a few years old, or if your lender wants to keep your business.
Remember: Look at the interest rate but don’t ignore the closing costs and fees, which can add up to as much as 5 percent of your loan amount, depending on where your property is located. These costs may include, but aren’t limited to:
- An application fee
- An appraisal fee
- Survey costs
- Hazard insurance
- Attorney/legal fees
- A title search
- Mortgage insurance
- Loan origination fees
- Title insurance fees
- Home inspection fees
- Discount points
- A credit report fee
Even if you’re happy with your lender’s offer, you should still compare loans and terms from several others.
Get A Good Faith Estimate
Lenders are required by law to give you a Good Faith Estimate, in writing, within three days of your application. This detailed worksheet is an accurate accounting of what the loan will cost you, and makes comparison-shopping for a new mortgage easy. Be sure to take into account the interest rate, monthly payment, and total interest you’ll pay over the life of the loan, as well as the closing costs and fees.
Once you’ve settled on a mortgage lender and loan terms, guarantee that what you’ve been quoted is what you’ll receive with a lock-in. Also known as a rate-lock or rate commitment, a lock-in ensures that the lender holds the rate and, if applicable, points, for a specified period of time while your loan is being processed. It often takes several weeks to process a mortgage; without a lock-in, the terms you were promised might not be available at closing.
On settlement day, compare the HUD-1 form that lists your actual costs with the Good Faith Estimate. Your Good Faith Estimate lists which costs can change prior to closing as well as the maximum amount by which they are allowed to change. Lenders must abide, so keep a close eye on the details, all the way to the end.
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