By Sean Knight
Refinancing mortgage rates sounds as simple as paying off an existing loan and replacing it with a new one. Easy, right? Unfortunately, the mortgage refinance process can be more than a little intimidating, and making mistakes can cost you thousands and undermine your financial goals – the whole reason you pursued a refinance in the first place.
However, refinancing a mortgage can be a great move in many situations. It's important to understand the unique position of you and your home, your financial goals, and what a successful refinance would look like to you. If you're asking, "Should I refinance my mortgage?", you're in the right place. To help you decide if a refinance is right for you, and help avoid common mistakes, we've pulled together some key refinancing tips below.
Why should I refinance my mortgage?There are plenty of reasons to consider refinancing, but it's important to take a close look at your current loan terms, financial needs, and the lending rate landscape in general, before determining if it's right for you. Some reasons you might refinance are: - Adjusting to a lower interest rate - Shortening the term of your home loan to build equity faster - Extending the term of your home loan to reduce your monthly payments - Converting from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa - Access your home equity for renovations, large purchases, or paying down other debt.
As with any financial decision, you'll also want to understand the costs associated with refinancing mortgage rates. A major con of refinancing are the closing costs tied to a new mortgage, from appraisal and application fees to broker fees. While these costs are almost always negotiable, they can range from 3 - 6% of the loan's principal, making it an important factor in your decision.
With those closing costs in mind, you'll also need to consider how long you plan on staying in your home. Every refinancing agreement has a theoretical "break-even" point, where the initial costs of a refinance eventually turn into savings, due to your lowered interest rate or overall shorter term. But if that break-even point is years and years down the road, and you're considering a move in the near future, a refinance would not likely make sense for your situation.
Know Your Credit (And Don't Fear The Report)Your credit score plays a central role in refinancing, responsible for determining what kind of rates and terms you're eligible for from a particular lender, also known as the underwriting process. It's wise to thoroughly check your credit scores from each of the three major bureaus: Experian, Equifax, and TransUnion. Check the reports for errors and resolve any as quickly as possible, then take any steps available to optimize your credit, such as a rapid rescore.
While shopping around with various lenders (we'll get to that in a minute), don't be afraid of multiple credit pulls. The Consumer Federal Protection Bureau (CFPB) protects your credit from being hurt by multiple credit pulls from mortgage lenders, as long as they're within a 45-day window. So from your first refinance-related credit pull, try to get all of your shopping done within the next 45 days at most.
Always Shop AroundEven if your current mortgage lender sends super-friendly emails or has warm cookies in their office, there is nothing to lose – and potentially thousands of dollars to gain – by shopping around. The world of mortgages is fiercely competitive, and it's a major opportunity for you to find the lowest fees and best rates.
In fact, you can mention other offers available to various lenders and force them to compete with one another – most fees are negotiable, and in some cases, can be completely waived to win your business. After shopping around, consider applying to 3-5 lenders around the same time to get all final offers on the table.
Know Your Closing CostsBefore you can crunch the numbers on the various refinance options in front of you, make sure you fully understand the closing costs associated with each loan. Your lender will provide a Loan Estimate and Closing disclosure, which summarizes the terms of your loan. The Estimated Closing Costs show how much the lender is charging you for the refinance, while the Estimated Cash to Close shows how much you'll pay out of pocket to complete the loan, or depending on the nature of your loan, how much cash you're getting back.
The second page of the disclosure is usually the Closing Cost Details page, breaking down any fees you might be paying to reduce your interest rate, application fees, underwriting fees, broker fees, and more. Almost any fee here is negotiable or removable - the lender can waive it or give you “lender credits” to make up for certain fees.
Lender credits are when a lender agrees to pay some (or all) of your closing costs, appearing under section “Total Closing Costs”. The loan document may show that you have $5,000 in total closing costs, but if the lender agrees to cover them, you will also see a $5,000 lender credit. This results in you paying $0 in fees, though they will likely still be listed out for transparency.
Use a Refinance CalculatorRemember that "break-even" point we were talking about earlier? A refinance calculator can help you determine that point, as well as your total savings, with any potential refinancing deal on the table. With all of the correct information available, a refinance calculator can help you understand your new monthly payments, your estimated monthly savings, and your savings over the lifetime of the loan. Use the refinance calculator to compare your closing costs to the estimated monthly savings to determine your break-even point, so you can effectively plan your financial roadmap.
If your closing costs total $5,000 like in our previous example, and your estimated monthly savings are $200, it'll take you just over two years to break even, which may not make sense if you're looking to move in the near future. However, if that same refinance gets you out of a climbing adjustable-rate, into a shorter overall loan term, or simply saves you $200 a month for the next 15 years or beyond, refinancing could be a great move.
Now that you're equipped with these refinancing tips, you'll be able to tell if a new mortgage makes sense for you. Remember, there is never just one road to success – your situation may be better suited to a home equity line of credit (HELOC), or just maybe, a Home Co-Investment from Unison .