A Complete Guide to Refinancing Your Home Mortgage
If you're paying an interest rate of more than 5 percent, now may be the time to refinance your home mortgage.
Although interest rates have risen slightly in the past few weeks, they are still at historic lows. The average rate for a 30-year, fixed-rate mortgage was 3.87 percent in the last week, and the average rate for a 15-year mortgage was 3.11 percent, according to the Freddie Mac weekly mortgage rate survey.
Deciding to refinance comes down to whether it will actually save you money, says Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage" and a mortgage professional in the San Francisco Bay Area. "Everybody wants a rule of thumb, and rules of thumb don't work."
%VIRTUAL-pullquote-The biggest mistake people make is they keep regenerating their loan so it's never paid off.%He suggests calculating whether the new loan will save you money based on the time left to pay off your old loan. The question you should ask yourself is: If you have 20 years left to pay on your mortgage and you get a new 30-year loan, would your payments be lower if you paid the new loan off in 20 years?
"The biggest mistake people make is they keep regenerating their loan so it's never paid off," Fleming says.
Jason van den Brand, CEO and founder of Lenda, a Web-based platform that allows homeowners to complete a mortgage refinance completely online, cautions against being drawn in by deals that advertise "rates as low as," because you're unlikely to ever receive those rates. "If it sounds too good to be true, it probably is," van den Brand says. Lenda, which so far handles only refinance loans in California, Washington and Oregon, believes it can save customers money by automating the process. Van den Brand notes that, as a lender, his company is different from sites that provide mortgage quotes and then hand off leads to brokers.
"You end up looking at a lot of sites that are ultimately lead-generation sites," van den Brand says. "Be careful about putting your name and number online unless you're ready to receive 10 calls an hour. Telemarketing is not necessarily the solution to a better experience."
Here are 11 steps to help you navigate the refinance process:
Make sure your credit is in order. Your credit score is perhaps the largest factor that will determine what rate you get on your new loan. Before you apply for refinancing, get a copy of your credit reports and make sure there are no errors. "Even if you think everything is fine, you might have a serious credit issue," Fleming says.
Know your home's value. Your house will have to undergo an appraisal for the lender to know its worth. That number will help determine how much you can borrow. Check comparable sale prices (not just listing prices) in your neighborhood to see if your house is worth as much as you think it is.
Get all your documents together. If you haven't applied for a mortgage recently, you may be surprised at how much documentation and verification is involved. Whether you're scanning, faxing or uploading with your phone, you'll still need to provide proof of employment, income and assets. That could mean pay stubs, tax returns, bank statements and other documents, which places a premium on organization. "The more you can have your documents ready, the faster the process will go," van den Brand says.
Get quotes from at least three mortgage lenders or brokers. When you start shopping for a mortgage, make sure you get quotes from multiple lenders or brokers. You might start with your bank, but also consult an independent mortgage broker because one may have programs and deals the other doesn't. Online quotes give an idea of the range of rates available, but only quotes using your real credit score and the loan-to-value ratio of your deal are truly accurate. Personal referrals are a better way to find a quality mortgage broker. "You need to make sure the mortgage professional you're working with is on your side and is going to give you good advice," Fleming says.
Decide whether to pay more now in exchange for a lower rate. If you pay "points" on a mortgage -- a point is a fee equal to 1 percent of the loan amount -- you can get a lower rate. If you plan to keep the home for more than three years, it may be a good idea to pay the points, Fleming says, as long as you pay in cash upfront and don't add to your mortgage balance. "Not only is your mortgage payment lower, but more of your payment goes to principal," he says.
Make sure you are comparing apples and apples. The numbers you want to compare are interest rate, fees and points. Fees will vary by lender. Rates will, too, but rates also will vary based on whether you want to pay points. You also will have additional fees that should be the same no matter which lender you choose, including state or local taxes and title costs.
Know that 'no-cost' refinance deals don't exist. A refinancing that has no upfront closing costs from the lender has the costs built into the interest rate or adds them to the principal balance. If you plan to keep the loan for a long time, you might be better off paying fees.
Consider whether to lengthen or shorten your mortgage. When you refinance you mortgage, you start the 30-year clock ticking again. If you don't want to do that, consider a 10-year, 15-year or 20-year mortgage, if you qualify. "If you can afford it, a 15-year loan or a 10-year loan is a good idea," Fleming says. Reducing the length of your mortgage can be an appealing option for homeowners seeking to pay off their house before retirement.
Weigh carefully whether to take cash out. If you take cash out to, say, remodel your kitchen, you will be paying for that remodeling job for 30 years -- during which time you may need to remodel again. If you take cash out to pay your child's college tuition, you put your home at risk if you don't make the payments, which doesn't happen if you take out an education loan. There are times when taking out cash makes sense (you can't get that low of an interest rate elsewhere), but there are times it's not wise.
Know what it will cost to close. The fees charged by the bank aren't the only costs you'll need to pay to refinance. You'll also need to pay taxes, legal fees, title costs and perhaps put additional money in escrow for taxes and insurance. In some states, it pays to shop for closing agents because fees may vary significantly. In other states, there is less variation.
Scrutinize the documents before closing. Ask to see the closing documents at least 24 hours before you're expected to sign. That gives you time to ask questions and get any errors corrected.