Should you refinance your home mortgage? If this something you are wondering now, you should know what your first steps should be. Of course some of this is simple. Before wondering about the answer to the question should you refinance, you needed to look to see if mortgage rates have come down, made sure your credit score is solid, and know that you’ll likely be living in your same home in a few years (and you’re here visiting our site!). But let’s say all of this has happened. Should you refinance your mortgage loan at that point? In this post we go over the initial steps as you choose whether you should refinance.
Should You Refinance, Step One
Should you refinance your mortgage? Perhaps you want to break that question down into parts. So let’s start with step one in your exploration. The first step is to call your current mortgage lender. The bank you currently use for your mortgage does not want to lose you as a customer if you are someone they consider low risk because you pay your mortgage payment on time. And in order to entice you to stay with them, they can offer you substantial savings on your refinance, such as:
– Lowering or even eliminating the “origination” fee, which is basically an application fee they charge for processing your mortgage refinance loan. This is completely fair actually, because your broker will have less paperwork on a current mortgage holder whose information is already with the lender.
– Charge less for a title search – a significant savings perhaps because these searches have become more expensive lately.
– Use surveys that were previously done when you originally took out your mortgage if they are seen as still accurate
– Give you a slightly lower rate as a current customer, or a credit of a percent of the value of your home (a percent of a point) toward closing costs. Again, if they trust you to make all your payments on time then giving you this discount is well worth it since a small part of the interest rate is there to cover those who default.
As you can see, calling your current mortgage lender may not only feel like the fair thing to do, but it may also lead to a less expensive refinancing option.
Should You Refinance: Choosing a Broker
Should you refinance even if you cannot get your current bank to handle your loan? Of course, but in this case you need to choose a broker. You have a huge variety of choices as far as reputable mortgage brokers who you can choose to guide you through the process. What is the one singular thing you need to know about him or her that can help you decide who to go with? In many cases, all else being equal, you need to the prospective mortgage broker’s record of closing loans on time.
Closing a mortgage takes a bit of work on the broker’s side. Experience will tell him or her how many mortgage refinances to take on at one time – too many and some clients could lose out. Your rate lock will have an expiration date, and its possible you will have no recourse if your broker was too disorganized or overwhelmed to make it happen. Of course you have to be careful to take responsibility for your end – return all paperwork that needs your information right away, and make sure your end of the process, such as scheduling the appraiser, goes quickly.
So how do you get the information necessary to know if your banker or bank has done a good job closing home mortgage loans on time? Unbiased websites often allow for customer feedback – just make sure that the comments are truly monitored by an independent source or automatically posted – you don’t want the true but unfavorable ones edited out. Word of mouth is also good – if a friend, family member, or neighbor had a good mortgage broker ask specifically how fast she or he was in moving the process along and responding to client inquiries. Should you refinance your mortgage you want to be sure your broker can see it through on time.
Should You Refinance Based on Rates
Let’s assume you have decided that you should refinance, you’ve either gone to your current bank or chosen a broker, and now you want the lowest rate possible. While I would be in my yacht in the Caribbean if I could predict where mortgage interest rates are headed, I can give you some advice:
Tip#1: Factor in the years
Do not merely calculate the new mortgage payment will be after you refinance without factoring in the years you are adding on to the end. For example, if you owe 27 more years on your current mortgage, calculate your new payment using the new rate and the amount you are refinancing but only over 27 years. You may fool yourself into thinking you are lowering your payment more than you actually are, just by adding years onto the end.
Tip # 2: Closing costs: to pay or not to pay
While a home refinance that has no closing costs may sound great, you often have to add a little to your interest rate to get your mortgage broker to reduce the closing costs to nothing. So, which is better – a no closing cost refinance or a refinance with a slightly lower interest rate. The answer likely lies in two factors, only one of which you have control over.
First, how long do you envision staying at the home you are refinancing your mortgage for? If you are paying $2500 in closing costs, and the reduced rate saves you $500, you’ll need to stay where you are for five years to reap the benefits of the no closing cost mortgage refinance deal.
Second – ad this is the oe that people often overlook – will rates drop to the point that you will refinance your home mortgage again. Using the example above, if you refinance your home mortgage within the five years, it was not worth the closing costs to get the lower rate the first time around.
Tip #3: Compare terms as well as rates
While most of us are attracted to mortgages for low rates (and brokers and banks certainly know this), the terms of a mortgage refinance can be equally important. In fact, some banks and mortgage lenders actually give lower rates that are based on weaker terms that could end up costing you in the long run. The most important term to make sure you get is no repayment penalties which could prevent you from refinancing when rates drop. But other terms may not be as obvious – such as a high penalty for late payment, a permanently higher rate if you ever miss a payment, or hidden fees. While it is tempting to just sign and return your mortgage documents you get after you lock, read them carefully and call your broker if you have any questions or anything looks out of place.
Should you refinance your home mortgage? As you can see from the above the question can be complicated and the answer requires you to go through a series of steps. But in the end you may be quite happy with your rate and terms after you do your homework should you refinance.