The Top Ten Refinancing Tips
Chances are that over the course of a typical mortgage, a home owner will have an opportunity for refinancing. Possible reasons to refinance a mortgage are compelling. They include:
- Saving money by lowering the interest rate
- Making monthly payments more manageable by stretching out the remaining loan term
- Stabilizing the monthly payment by switching to a fixed-rate mortgage
With so many factors in favor of refinancing, it is a shame that anyone would fail to refinance a mortgage just because the process can seem complex at first.
10 Easy Ways to Streamline Refinancing a Mortgage
As with many things, refinancing can be broken down into a series of smaller steps, each of which is fairly simple on its own. For example, the following are ten tips that can help anyone refinance a mortgage successfully:
- Specify the reasons for refinancing. Is the purpose of this refinancing to lower the interest rate, reduce the monthly payment, or lock in a fixed monthly payment? The type and terms of the refinance mortgage needed will depend on which of these--or which combination of these--goals is in play.
- Define the refinance mortgage parameters. Based on the above goals, set targets for interest rates and monthly payments. Decide on the mortgage term and whether to apply for a fixed or adjustable-rate mortgage. A refinance mortgage calculator can help define these parameters.
- Check your credit rating. In particular, find out whether it has changed since you last applied for a mortgage. A low credit rating will affect the interest rate and the availability of a refinance mortgage.
- Determine changes in property value. A drastic drop in property value can make it difficult to refinance a mortgage unless that mortgage is old enough to have been paid down substantially.
- Research prepayment penalties on the existing mortgage. Some mortgages have penalties for early repayment, which includes refinancing. This is not necessarily a deal-killer, but it is important to know the amount of any penalty so it can be measured against the potential savings from refinancing. Also, the original lender might waive this fee if they handle the refinancing.
- Obtain refinance mortgage quotes from a variety of refinance mortgage lenders. Mortgage rates and lending standards vary from institution to another, so it is well worth researching multiple refinance mortgage lenders.
- Ask lenders for full disclosure of points, closing costs, and other fees. This will help with setting up apples-to-apples comparisons between refinance mortgage lenders. For example, the lender offering the lowest interest rate may also be charging the most in points. Try to request quotes with as nearly identical terms as possible for comparison purposes.
- Ask lenders how long they will commit to their rate quotes. Lenders can't offer the same rate indefinitely, but they may commit to locking in a rate for a reasonable period of time to allow for the application process.
- Use a mortgage calculator to compare monthly payment savings with closing costs and other upfront fees. Besides comparing refinance mortgage quotes against each other, also compare them against your existing mortgage. It is likely that there will be a trade-off between paying upfront expenses to refinance a mortgage and achieving a savings in subsequent monthly payments. It is important to make sure the savings in monthly payments will, in time, adequately compensate for the upfront costs.
- Check for any prepayment penalties in the refinance mortgage. As mentioned in tip #5, prepayment penalties can dampen the benefits of refinancing. Since another refinancing opportunity may arise in the future, it would be helpful to avoid prepayment penalties in the refinance mortgage.
Again, each of the above is a simple step on its own, and taken together they will help clarify the process of refinancing a mortgage.
About the Author:
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.