Steps to Refinancing Your Mortgage
Mortgage loan interest rates have plummeted in recent years, leaving many homeowners eager to refinance and capitalize on the potential interest savings. Other homeowners may wish to refinance because they fear future interest rate increases on their adjustable-rate loans and would prefer the security of a fixed-rate mortgage. Regardless of your motivation, refinancing your mortgage can be a rewarding decision when done properly. To help you through the process, we’ve created a five-step guide to mortgage refinancing.
- Think about the pros & cons. Refinancing to a mortgage with an interest rate that is just 0.5% lower than your current rate can save you up to hundreds of dollars each month. However, there are considerable costs and risks associated with refinancing. You will need to cover a substantial amount of up-front costs that will take years of savings to recoup. You should plan to remain in your home long enough to pass the break-even point.
- Get the paperwork ready. Mortgage refinancing requires a great deal of paperwork, so start gathering the necessary documents now. You will likely need to provide your income tax statements, recent pay stubs, bank statements, and other documents that prove your income and assets. You might also want to check your credit score before you apply. The best refinancing rates are only offered to borrowers with excellent credit ratings.
- Look around for lenders. You will be doing yourself a disservice if you apply for a refinancing loan with only one lender. Instead, apply for quotes on mortgage refinance loans with at least two or three lenders. If, however, you are happy with your current mortgage lender, you might begin your refinance loan shopping with that bank. Once you receive an offer, see how it stacks up against the offers of one or two other banks to ensure that you’re getting the best deal. Also remember that you do not have to limit yourself solely to traditional banks. You might also shop for refinancing loans from credit unions or mortgage brokers.
- Request an accounting of all fees. Refinancing loans have up-front costs, such as application and appraisal fees, as well as closing costs, which can add up to several thousand dollars or more. When you are comparing loans, ask each potential lender for a detailed accounting of all fees associated with the refinancing mortgage. By law, your lender has to provide you with an estimate of these fees within three days of receiving your application.
- Stay detail-oriented. Once you find the right mortgage loan for your needs, remember that mortgage rates fluctuate even on a day-to-day basis. To prevent the rate you were initially offered from rising, ask your lender to lock in the rate until you close on the loan. Additionally, be sure to save enough money to cover closing costs and leave yourself a little leeway. The estimate your lender provides early in the process will not be exact, and you don’t want to be caught off-guard if the estimate was too conservative.
