Choosing to refinance your mortgage can be a great decision and a fantastic way to save money – if you know what you’re doing! To help you save the most money possible, we put together a list of ways to make sure that you get the best deal when you refinance.
1. Be a Super Detective about Research. Nobody likes to do homework, but it’s important if you want to get the best deal. Rather than just calling your existing lender right off, take the time to understand your current credit score, find out the value of your home, and compare the rates of different lenders.
2. Avoid New Debt! Lock up your credit cards and throw those new offers in the trash; when you apply for a refinance, your credit is going to be checked thoroughly not once but several times. If you start applying for new cards or running up high levels of debt, it will be noticed; your credit score will drop and your mortgage rates will go higher.
3. Work that Credit Score. The better your credit score, the greater your chances of a lower mortgage. If your score is below 600, it’s estimated that only two percent of lenders will be willing to work with you.
4. Don’t Be Afraid to Check out Other Lenders. Sure, you may like your current lender, but that’s no reason not to shop around for other options. You maybe surprised to discover that other rates are lower! Don’t forget to check not only the interest rate but also the loan fees associated.
5. Get it in Writing! When you go for quotes, make sure that you get prices in writing. Otherwise, there is no proof that you were offered that deal. Having some quotes in writing may also help you to get a better deal with your existing lender when they see that you’re serious about taking a different deal.
6. Take Everything into Consideration. Revisit your current mortgage and make sure that there is no early pay-off penalty; you don’t want to end up fined for trying to get your loan paid early! Also, figure if the closing costs of refinancing are truly worth the time that you have left to pay your mortgage.
7. Notice Key Ratios. There are two ratios to consider when refinancing your home: Loan-to-value ratio and debt-to-income ratio. Loan-to-value or LTV ratio is the percent of the money that you are borrowing against your home’s value. The higher your LTV, the more likely it is that you will have to purchase mortgage insurance which can be costly in the end. The debt-to-income ratio or DTI is your ability to pay your debts displayed in a percentage. If your DTI is high, you may have a difficult time refinancing.
8. Be Sure to Lock Your Rates! Sure, rates are likely to go down but they are also likely to shoot up. If you don’t lock your rates, then you’re making a gamble that could cost you big time. Rather than taking the risk, choose to lock your rate. Most often rates are locked for one or two months at a time. Since extended rate locks cost some money, be sure to submit all your required documents as soon as possible.
9. Expect Some Problems. Refinancing isn’t always a walk in the park. In fact, depending on your credit, income, and documentation, it may actually be a rough and unpleasant road to travel. Since mistakes happen, realize that you do have a rescission period, which means that you have the right to cancel your deal three business days after signing. If you choose to go this route, you will need to send a letter stating your intention to cancel through registered mail and include a return receipt.
10. View the Broad Picture – Not Just the Interest Rate. When people refinance, the first thing they want to look at is the interest rate. Of course, since the interest rate is the main factor this makes sense, but it’s only a part of the broad picture. Depending on your lender, they may try to sucker you into paying astronomically high closing fees by distracting you with a low-interest rate. Before you apply for the loan, look over the entire deal as a whole and ask questions about things like fees, points, and credit reports. While the loan isn’t secure until you have the God Faith Estimate in hand, it’s a red flag if the price starts bouncing around. If you have a hard time comparing everything, ask your lender to quote the price of a packaged “no cost” refinance, which means that all the fees are bundled into the loan. Although you may not want to do your loan this way, it still gives you a good overview of the price as a whole.
11. Examine All Documentation. There’s a reason that refinancing comes with so much paperwork and, while many people may choose to simply glance and sign, they maybe doing themselves a serious disservice. The Good Faith Estimate is a breakdown of what your new mortgage will mean and includes the interest rate and all fees. Compare what you had calculated against the Good Faith Estimate that you are offered. If you are paying more than you expected, it maybe time to move to a different lender. Watch out for hidden fees and match everything you pay against the Good Faith Estimate.
12. Know Your Break-Even Point. Refinancing a mortgage is not free; in some cases, the costs of fees and applications can reach as much as five-grand. The break-even point is the time when you have paid off the cost of refinancing and are actually able to start saving money. If you have to pay five thousand on the refinance itself and save $150 each month, it will take you over 33-months to reach your break-even point. If you have any plans to sell before you reach the break-even point, then refinancing is actually going to be a loss rather than a gain.
13. Don’t Miss the Boat Waiting on Something Better! Right now, mortgage interest rates are super low, making it the perfect time to refinance; however, some people may miss their opportunity entirely by waiting on it to get better. Rather than trying to play the market and time the mortgage rates for the lowest possible, you will probably do best to simply jump on board and enjoy what’s available while it’s here. It would be a shame to hold out on lower rates only to see them skyrocket.
14. Don’t Go for Too Much Home Equity. Refinancing gives homeowners the opportunity to take money out of their home, which basically means that they get a loan with their house as collateral. This is a fantastic way to gain enough money for some minor home repairs or household purchases; however, this is not a fool-proof way to pad your pocket. If you take out too much equity, you may find yourself in big trouble if the house market drops or your family is hit by financial problems. Before taking out equity, consider how much money you truly need – not how much you want!
15. Understand What a Longer Loan Period Means. When you refinance, you’re not just changing around some numbers; instead, you’re taking out a brand new loan. So, if your monthly payments seem drastically lower than usual, it may not be because you’re getting a fantastic deal but simply because you’ve got the more additional years worth of payments due. In some cases, lower monthly payments are worth any extra cost in the long run; however, if you truly want to save money, take the time to consider how much the refinance is going to cost in the end. If your new loan is going to have you spending tons more than your original over a longer period of time, it may not be worth it. The best way to save money is to simply refinance your loan into the same period of time that you have remaining on your current mortgage.
16. Be Wary of Prepayment Penalties. Sometimes lenders may push you to agree to a prepayment penalty. While this may help to lower the interest rate on your mortgage, it also means that you can’t pay off for several years. Although most people don’t refinance if they’re planning to sell, this is still something to consider. If there is any chance that you will want to sell or refinance again in the next three to four years, this is an option to avoid. Also, watch out for any prepayment penalties that will still be around after the regular four-year-period.
17. Keep Your Eyes Open for “Junk Fees”. No matter how sweet your lender seems, chances are that they may try to throw some additional fees onto your mortgage. Some fees such as application, title, and origination fees are to be expected but look out for strange additions such as charges for delivering the documents, preparing them, or getting credit reports. If you’re getting fined for a service that you could have done at home in your pajamas with no cost, there’s no reason to be paying your lender for the same work.
Refinancing is a great opportunity to save money on your mortgage. By using the tips listed above, you can rest assured that you will get the best deal possible and won't be hit with any unpleasant surprises!