I. OVERVIEW OF TOPIC
If you've been thinking of home refinancing but are a little unsure
about how to proceed, this Guide is for you.
Home refinancing is an obvious step for you to take if you want to lower your
monthly mortgage payments, reduce your interest costs, or cash out.
By "cash out," I mean using your home equity as collateral for a
low-cost loan which you can then use to finance other things, like
a vacation, a new car, or a child's college education.
There are three steps in refinancing:
1. Find a new mortgage that gives you better terms than your current one.
2. Apply for the new mortgage.
3. Pay off your old mortgage.
Four Important Caveats
First, be aware that refinancing is just one of several ways you can
tap into the equity in your home. You may also want to consider a second
mortgage, a home equity loan, or a home equity line of credit. It's a
good idea to talk with your broker or lender about these options before
going the home refinancing route.
Second, you should recognize that there's a wide difference in the
terms you can get from various lenders and brokers. It's important to not
jump too fast. Shop around for your refinancing deal. Yes, you should
definitely call your present lender and give them a chance to keep your
business. But also apply through two or three other lenders as well.
Even a seemingly tiny difference in your loan terms (such as a quarter or
half point in the interest rate) can amount to a very large difference in
your monthly payment or the total interest you pay, or both.
Third, beware of advertising pitches about refinancing deals that
promise extremely good terms. Usually, these pitches are applicable only
to people with very good credit scores (700 or above). In any case, home
refinancing is a decision you should make based completely on whether it
will be financially beneficial to you, as discussed below, not on what
deals are out there at any given time.
Fourth, watch out for prepayment penalties. Does your present
mortgage have a prepayment penalty built in? This could render
refinancing uneconomical. Check this out before proceeding. And try to
avoid agreeing to such penalties in your next mortgage.
The Basics
You'll find refinancing is not a lot different from the experience you
had in obtaining your original mortgage. You'll have to jump through most
of the same hoops all over again. Your goal, presumably, is to get a
better deal the second time around. For this you'll need one or more of
the following:
-A higher income than you had when you applied for your first mortgage
-A higher credit score
-A build-up of equity in your home
-A history of on-time mortgage payments
Unless you can get a better deal, forget it. You will probably incur
substantial closing costs in refinancing. That is, unless you can recoup the costs
of refinancing, and do so reasonably quickly, it's usually not in your best
interest to refinance. (An exception would be if you absolutely need to
lower your monthly payments, even if it costs you some money to do so.)
Note, however -- and this is a point a lot of people miss -- it's not
necessary to get a lower interest rate. You may be able to get a better
deal by switching to a different kind of mortgage, such as a variable
interest mortgage, or maybe you can extend the term of the mortgage and
thereby lower payments.
Unraveling The Complexities of Home Refinancing
The Internet comes to the rescue in helping to unravel the
complexities of refinancing. Financial calculators are widely available
which can help you quickly figure out how long it will take you to break
even -- i.e., recoup your loan costs -- for a given mortgage. You can
also check out mortgage rate data nationwide and get referrals to lenders
and mortgage brokers nationwide.
One of the best websites for researching refinancing deals is
Bankrate.com, which is the Internet's leading financial rate information
website. But in addition to any research you do at Bankrate.com, remember
it's also a good idea to discuss your specific situation and financial
goals with a reputable lender/broker before signing for a new mortgage,
which, after all, is one of the most important decisions of your life.
You need to sit down and figure out what specific terms you
must get in order for a home refinancing package to be beneficial to you, given
your specific goals. There are, as I said, financial calculators on the
Web which can make this pretty painless. One is at
Home Finance.
Suppose for example you now have a $200,000, 30-year, fixed-rate
mortgage at 7.25 percent. Given this, your monthly payment is (as the
financial calculator shows) $1,364.35 and the total interest you'll pay
over the full term of the loan (30 years) is $291,166.
Now suppose you have an offer from a lender for a 6.75 percent loan
for the same $200,000. That's just a half a point lower than your current
mortgage. However, the financial calculator reveals that your monthly
payment would drop to $1,297.20 and the total interest you'd pay would
drop to $266,992. So you'd save $67.15 per month and also $24,174 in
total interest paid in 30 years.
Would this amount of savings be worth the time, effort, and cost of
refinancing? For most people, probably yes.
Of course, to benefit in this way, it's not necessary that general
interest rates decline. You may be able to refinance and obtain a
somewhat lower rate even if rates have held steady provided your own
credit standing has improved or you've built up a good deal of equity in
your property. Another possibility is to take out an adjustable rate
mortgage that offers lower rates. This need not involve greater risk.
Suppose you plan to move in three years and you can find a mortgage whose
interest rate is fixed until the fourth year, at which time the adjustable
rate feature kicks in. Then you don't really care -- you're selling the
property at that time anyway.
Paperwork to Prepare For
Remember the big paperwork hassle it was to take out your first mortgage?
The second will be a repeat performance plus one or two additional
irritations. But if you prepare the documents you're going to need to get
the loan ahead of time, the hassle will be greatly reduced. Here's what
you'll need --
- All the following: current value of your home (the lender will arrange
an appraisal to verify your estimate); amount owed on your mortgage; terms
of your mortgage, including interest rate; your credit report and credit
score
- Pay stubs from the last month
- W-2 forms for the past two years (or tax returns for the past two years
if you are self-employed)
- Bank statements for the past two months
- Investment and IRA account statements for the past two months
- Copies of your current mortgage documents which you received at the
closing
Main Points to Remember about Refinancing
-Refinance only if it makes financial sense, given your particular goals.
Most people's goals involve one or more of these: obtaining a lower
interest rate, shortening or lengthening the duration of the mortgage,
cashing out the equity in the property.
-Shop around for the best deal. The Internet can help a lot here.
-Do your arithmetic. Use financial calculators to figure out what your
break-even point is given various financial scenarios. Bankrate.com is a
good source for these tools, as well as much additional information.
-Remember that most refinancing ads are targeting extremely credit-worthy
individuals (those with credit scores above 700). Average consumers
usually won't qualify for the great deals they're promoting.
-Don't focus entirely on the interest rate or the monthly payment. You
also need to figure out the fees involved. When comparing the refinancing
deals offered by various lenders, always focus on the loan's APR, which
reflects the total cost of the loan.
-Today, you can do much or all of your home refinancing-deal comparison shopping
via the Internet. It's no longer really necessary to personally visit
banks and other lenders, unless you are more comfortable doing it that
way.
There are hundreds of refinancing businesses on the Internet. I've
checked out most of the major ones, and in the For Additional Research Section (below),
have described the ones I think are most likely to be of value to you.
That's it - our ten minutes are up! (OK, maybe twelve or thirteen if you're a slow reader.) Below is a listing of Web resources to help you continue your research on home refinancing.
II. FOR ADDITIONAL RESEARCH
This Section provides reviews and recommendations of Web sites and other
online resources.
LENDING TREE
No doubt you're familiar with Lending Tree from its many TV and print ads. But is it a good service? Yes, in my opinion. In fact, it's a perfect example of how the Internet has empowered consumers. It pulls together and displays vital information, based on hundreds of sources, and does it for free. For example, if your interest is in refinancing your home, you complete a single Application Form and then have that application reviewed by numerous major lenders without any cost or obligation. To start the process, go to the Lending Tree Mortgage Application Form page, then provide the information requested. A customer service toll free number is provided in case you have any questions, but basically you'll indicate your State of Residence and Purpose of Loan (choose "Refinance Mortgage"), then on the next page provide information about your property and finances. You'll receive bids from up to four major lenders. If you're considering refinancing your home or other property in today's ultratight market, Lending Tree is one of your best online research tools.
WOWquote
Provides up to three referrals to home refinace lenders in your area. No fees or obligation.
Related Web Search Guides
Other Web Search Guides you might find useful:
Mortgages
Personal Loans
Checking Out Lawyers
Recommended Reading
III. Discussion Group
