8 Things You Should Do Before You Refinance Your MortgageA Mortgage is a document granting a lien on a home in exchange for financing granted by a lender. The mortgage is the means by which the lender secures the loan and has the ability to foreclose on the home.
With 30-year interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds. rates well below 5 percent, and 15-year interest rates between 4 percent and 4.5 percent, it’s time to start seriously thinking about refinancing your mortgage.
But before you high-tail it to the nearest mortgage lenderA Lender is a person, company, corporation, or entity that lends money for the purchase of real estate. and fill out a mortgage applicationYour Application is a series of documents you must fill out when you apply for a home loanA Loan is an amount of money that is lent to a borrower, who agrees to repay it plus interest., or insurance policies., there are 8 things you should do:
1. Check out the interest rate you have on your current loan. When interest rates dip, the natural inclination is to start filling out loan applications left and right. But too many times, homeowners are focused solely on the new interest rate instead of how much they’ll save by refinancing. While you may get water cooler-bragging rights, you should only refinance if it’s going to save you money.
2. Find out how much your home is really worth. There’s no way to sugarcoat it: Home values have sunk around the country an average of about 20 percent in the past year. In some places, like Las Vegas, Miami, Phoenix and greater San Francisco area, the decline has been twice as steep. It’s vital to assess whether your home still has any equityYour share of ownership in a company. Stockholders are often referred to as equity investors, because they invest in the equity of a company. (the difference between what you owe and what the home is worth) or if you are “under water” with your mortgage (meaning that you owe more to your lender than the property is worth). Whether you have equity will determine what kind of refinance is open to you.
3. If you’re underwater with your mortgage, assess how far underwater you are. While federal requirements have changed with regard to refinancing loans owned or serviced by Fannie Mae, Freddie Mac, or FHA, if your loan is more than 105 percent of the value of the property, you may not be able to refinance without bringing cash to the table. (You may still be eligible for a loan modification, however.)
4. Get a copy of your credit history and credit score. Since the credit crisis began, lenders have raised the credit scores required to get approved for the best loan programs and best interest rates. The best place to go for a copy of your credit history and credit score is AnnualCreditReport.com. It’s the only place where the three credit reporting bureaus provide a free copy of your credit history each year, plus you can pay $7.95 for a copy of your credit score. Choose the Equifax credit score, since it’s the one closest to the score used by most lenders. (You can also go to MyFico.com, and purchase your credit history and FICO score for $15.95. You may also find their online community to be helpful in terms of suggestions on how to raise your credit score.)
5. Start identifying potential lenders. Shopping around for a loan takes a little more planning and effort than it used to, as lenders have jacked up the fees they charge to underwrite and process the loan. Your best bet is to talk to a national lender, a credit union (if you belong to one or can join one), a local mortgage brokerA Mortgage Broker is a company or individual that brings together lenders and borrowers and processes mortgage applications. (call your real estateReal Estate is land and anything permanently attached to it, such as buildings and improvements. agentAn Agent is an individual who acts on behalf of a consumer. A real estate agent represents a buyer or a seller in the purchase or sale of a home. Licensed by the state, a real estate agent must work for a broker or a brokerage firm. An insurance agent helps a consumer purchase an insurance policy. Insurance agents are also licensed by the state.A Real Estate Agent is an individual licensed by the state, who acts on behalf of the seller or buyer. For his or her services, the agent receives a commission, which is usually expressed as a percentage of the sales price of a home and is split with his or her real estate firm. A real estate agent must either be a real estate broker or work for one. if you don’t know one and ask for several recommendations), and perhaps an online lender.
6. Find out if your second lender will subordinate to your first lender. If you have a first and a second mortgageA Second Mortgage is a mortgage that is obtained after the primary mortgage, and whose rights for repayment are secondary to the first mortgageA First Mortgage is a mortgage that takes priority over all other voluntary liens.. (also known as a home equity loan), find out whether the second lender will subordinate to the new first lender. That will allow you to refinance your first mortgage, while leaving your second loan in place. Many second lenders will not agree to this, and if yours doesn’t, you may not be able to refinance at all unless you pay off the second loan. One possibility is to refinance your first mortgage with the lender who owns your second loan.
7. Focus on the big picture, not just the interest rate. While the interest rate you’d get is important, it’s also important to calculate how much you’d pay in fees, and how long it will take to pay yourself back the cost of the refinance with your monthly savings. For example, if you’re only going to save $50 per month, and it costs you $5,000 to refinance, it’ll take you 100 months, or more than 8 years to pay back the cost of doing the loan. You won’t start saving until well into the eighth year of paying down the mortgage. So, unless you’re cutting the term of the mortgage significantly (going from a 30-year to a 15-year), or you’re able to pay off the costs in a relatively short period of time (say, less than a year or 18 months), it may not pay to refinance.
8. Get your paperwork together ahead of time. Before the housing crisis, you could almost do a refinance over the phone. In fact, you could call the loan officer you worked with regularly and put in your order for a refinance. You could do a no-cost refinance without providing much in the way of proof of earnings, or account statements or copies of tax returns. The forms would be delivered to your home; you’d sign them and send them in. Today, you’ve got to have your paperwork in order before you can refinance. Gather together your W2, a current paycheck, copies of your last two federal and state tax returns, copies of your bank accounts, retirement accounts, and other assets. Then call the lender.
April 9, 2009