Refinancing, or applying for a new home loan to pay off your current home loan, is an attractive option for those unlucky borrowers whose adjustable rate mortgage sent their monthly home payments up, up, and away. However, even homeowners with fixed mortgages may want to replace their current loan with a more favorable one, raise money for home improvements, reduce monthly payments, or pay a loan off quicker. Refinancing, when done properly, can help. Here’s how to do it:
Set Clear Refinancing Objectives
Are you looking to lower monthly payments? Pay off your home sooner? Lower the overall cost of the loan? Defining objectives will help you figure out what type of loan you want and whether the current options are going to help you achieve that goal.
You may want start by reviewing the terms of your current loan, if you don’t already know them inside and out. Find out about the different types of mortgages on the market to understand the risks and benefits of each. For instance, if you want to lower your monthly payments to free up funds for something else, this may require you to extend the length of your loan, and result in an overall increase in costs.
Research and Compare Costs and Lenders
Refinancing requires many of the same steps that are involved in getting an original mortgage; it also comes with many of the same fees. The general rule of thumb is that if interest rates are two points lower than your current interest rate, it may be a good time to refinance. However, the costs associated with refinancing—closing costs, points, fees—all need to be factored in when comparing loan terms between lenders. Even if the interest rates are low, you may not save money once everything is factored in.
Ideally, you’ll shop around to three or more lenders, compare the overall costs and decide whether refinancing makes sense. Here are some things to ask about in addition to the terms of the mortgage:
- Rates
Find out the current mortgage interest rates, whether or not these change weekly and whether they refer to fixed or adjustable mortgages. - Points
Points are fees paid to the lender, sort of like a service charge. A point generally equals 1 percent of the loan; the amount of points you pay on a loan will vary with the interest rate. In general, low interest rates mean more points. Since it can be a sizeable amount of money (four points on a $200,000 loan is $8,000), find out how many points the lender is asking for at each interest rate. - Fees
There are many. Broker fees, underwriting, transactions, closing costs—get a detailed list of all the fees the lender includes in refinancing and make sure the list is complete. Fees are sometimes negotiable.
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