Refinancing a mortgage on your home can provide several benefits to your personal finances. If the current rates are lower than your existing mortgage, then there could be a possibility that you can get a lower monthly house payment. In some cases, a homeowner can save a couple hundred dollars each month on principal and interest just from taking out a new loan at a lower rate.
Another huge advantage of refinancing a mortgage is the total cost savings over the course of a loan. For example, if you are planning on living in the home that is being refinanced on a 30 year fixed rate, then you could probably save hundreds of thousands of dollars in interest over the entire loan. Even though the benefits are spread out over 30 years, it is hard to pass up a deal like saving a $100,000!
While the potential savings from a refinance of your mortgage can save a ton of money, there are several factors to keep in mind. Even as interest rates remain very low, banks are not as willing to lend as they once were. This is why it is important to do your research before speaking with a lender if you are considering refinancing a mortgage.
Considering Refinancing a Mortgage?
My wife and I are exploring refinancing a mortgage on our current home. As I have found out over the past couple of weeks is that it is a lot harder now than it was even 5 years ago to refinance your mortgage.
I recently went through the hassle of calling around from lender to lender asking about their current rates. Based on some of the questions I got from lenders, I figured it would be good to share. Here are 8 tips that I have been using as my wife and I look at refinancing a mortgage on our current home.
1. Current Mortgage Rate
An existing homeowner should know their current mortgage interest rate they are paying. More than likely, this will be one of the first questions a lender will ask you when speaking with them about refinancing. If you don’t know what your current rate is, then you need to call your current lender and find out.
You should also know what type of mortgage you have? Are you paying a fixed or variable rate? Is your mortgage a 30 year, 15 year, or adjustable rate mortgage (ARM)? All of these questions should be easy to answer and will be necessary to determine if you should refinance or not.
2. Remaining Principal
What is the remaining principal left to pay on your current mortgage? Chances are this will be the amount that you will probably refinance, give or take a few thousand dollars. Some homeowners choose to roll any closing costs, or origination fees back into the refinance, so the new loan amount may be higher.
Since your existing principal should be decreasing every month, it is important to keep up on your remaining balance before talking with a new lender. Most mortgage lenders offer online access so that you can quickly check your existing balance along with your current interest rate.
3. Estimated Value of Your Home
This can be a tough one for many homeowners, especially in a bad economy like the one we are in now. Probably every lender you talk to about refinancing a mortgage will ask you to estimate the current value of your home. This question is important for both the homeowner and lender to ensure that you still have 20% equity in your home.
As housing pricing continue to decline, so does the equity that a homeowner has. In many cases, homeowners are finding out that just because they originally put 20% down on their mortgage doesn’t mean that they have the same equity in today’s market.
There are a few options for those who no longer have 20% in their home to refinance, but they are limited. The homeowner could choose to pay PMI (private mortgage insurance), which is required on a loan with less than 20% equity. A check could also be written to the new lender to make up for the shortfall in the amount of equity.
Ultimately the choice is up to the homeowner in what steps to take. In some cases, a refinance may actually cost you a lot more money even with a lower interest rate.
4. Have an Idea of Your Credit Score
You should have a decent idea of your credit history and score. Even if you don’t know your exact score, you should have some clue if your credit is poor, fair, good, or excellent. Mortgage lenders will offer much better rates on a refinance to those who have good and excellent credit.
If you are planning on refinancing and receive a interest rate quote, be sure to ask what credit score is required for such a rate. A lender may not always provide this information up front, which can lead to issues further down the line.
5. Number of Payments Remaining
How many payments do you have remaining on your existing loan? Again, this data should be readily available through your current lender. Depending on your current mortgage and the number of remaining payments, it may make sense to switch to a different type of loan. For example, those who have paid off several years on a 30 year fixed may want to consider switching to a 15 year fixed to get a better rate.
Another important thing to remember is if you decided to keep the same type of mortgage, then you will actually be adding more time and payments back on to your loan. For example, if you have paid off 5 years on a 30 year fixed and refinance for the same terms, you will go from 25 years remaining back to 30. While the total principal and interest paid on the new loan may be a lot less, it will take you longer to pay it off.
6. Ask About Fees and Points
Closing costs, origination fees, appraisal fees, etc. can sometimes be the deciding factor when it comes to refinancing. One of the most important questions you can ask is for the lender to explain all associated fees involved with refinancing a mortgage. Depending on the lender, homeowners can expect these costs to run from a couple hundred dollars to several thousand.
Also ask the lender about points that may be added into the quoted mortgage rate. Certain times, lenders may try and sell you on a rate which has points tied to it. This will ultimately cost you a lot more at closing.
7. Run the Calculations
Since you already need to know your remaining principal on your existing mortgage, why not run a few what-if scenarios with current interest rates. There are plenty of free sites like Bankrate.com that provide quick and easy calculators that can help you figure out if refinancing is even an option.
Since I am a visual person, I prefer to run several mortgage calculations using worst and best case scenarios. I have found that it is easier to speak with a mortgage representative if I have already done my homework and know what I am talking about.
8. Research & Ask Questions
Did you know that most banks will not refinance an existing mortgage if your home was up for sale in the past 6 months? My wife and I tried to sell our home so we could move closer to family. Unfortunately as the economy continues to struggle, it is extremely difficult to sell a home. As a result, we threw in the towel and have decided to stay long term.
Now we are finding out that most lenders won’t touch a refinance on our home because it was recently taken off the market. As I spend the time calling around to various mortgage lenders, it is the very first question I ask. It saves me a lot of time and hassle talking over details with a lender only to find out they can’t refinance our home.
As a side note, it seems that about 25% of the lenders I have contacted will offer a refinance once the home has been off the market for one day. The other 75% seem to require the six month threshold.
Have you thought about refinancing a mortgage at all recently? What tips can you provide to those homeowners consider a refinance?
Related posts:
- Refinancing Your Mortgage Can Lower Your Total Costs of Owning a Home
- Thinking of Refinancing? Don’t Forget About Origination Fees
- How We Plan to Pay Our Mortgage Off Early – Nov (2011)
- The 4 Most Unexpected Reasons Preventing You from Refinancing in the New Economy
- How I Saved Over $70,000 on my Mortgage
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