With mortgage rates still at near record low levels, if you purchased a home or refinanced a few years ago when rates were significantly higher, you may be inclined to try to refinance that mortgage. Refinancing can certainly make sense when rates are low, but it isn’t a slam dunk and it may not even be worth it to refinance in some situations. In addition, it’s a process that will take some time and effort on your part, so being prepared will make it a much easier process.
Deciding If Refinancing is Right For You
Before even calling banks and getting quotes, you first should take some time to look at your situation to see if refinancing is even the right thing to do right now. First, how much equity do you have in your home? This is important because to do a traditional refinance, the lender will likely want the LTV ratio to be no more than 80 percent. With the fall in home values in recent years this makes it tougher for many people to qualify for a traditional refinance.
If you don’t have much equity in the home, or may even be upside down, then you’ll want to explore HARP. This program was put in place to help homeowners who may have been hit with the declining real estate market and wouldn’t otherwise qualify to refinance into a lower interest rate loan. The problem is, not all banks participate, and even those that do may place their own restrictions on the loans they will refinance. And finally, not all mortgages even qualify for HARP. So, before moving forward, check to see if you qualify at the HARP website.
Finally, even if you’ve discovered that you can refinance, you’ll want to make sure it’s worth it to refinance. A lot of it depends on the rate on your current loan and how long you expect to live in the house. Remember, when you refinance a mortgage you’ll have closing costs. These include loan origination fees, credit checks, title insurance, and possibly even prepaid escrow. This could mean a few thousand dollars out of your pocket at closing, so you must look to your monthly savings to see how long the breakeven point is. If refinancing saves you $100 a month on your mortgage payment but you end up paying $2,500 in closing costs, it will take you two years and one month to break even. If you think you may not live in the house for much more than a couple of years, then you may want to reconsider doing the refinance.
Before Contacting Lenders
Once you’ve decided that you actually do want to go through with a refinance the next logical step Is to start contacting lenders, right? Almost. You will need to get in touch with lenders to get quotes and to see who will qualify you, but you can do one more thing first that will save you a ton of time during this process. The banks will require financial information from you, so rather than waiting for them to demand documents, get everything ready to go and at your fingertips before you even start to make the calls.
For instance, you’ll likely need recent pay stubs, at least one, maybe two years of tax returns, proof of homeowners insurance, bank statements, and so on. So, gather these documents ahead of time and make copies of necessary. You’ll be doing a lot of faxing, scanning and emailing, or dropping off the documents at an actual branch. Instead of scrambling to find the documents as they are needed, you’ll be able to turn these items around in a matter of minutes instead of hours or days.
Working With Lenders
One of the best things you can do once it’s time to start getting quotes is to go into the discussion with an idea of what you want already. If you know what term loan you want, and what the typical rates are for that type of loan, you can spot a good deal instantly. You can also save a lot of time when they come back with a higher rate and then try to sell you on it by adding points, stretching the term, and so on. Don’t let them sell you a loan, but let them tell you what they can offer, and if it stinks, move on to the next lender.
After settling on a lender the ball is in their court for the most part. You may still have to provide a document or two, but it will be up to them to push it through underwriting to get it done. Even though this process can take upwards of a month, be sure that if they call you, email you, or request any information from you that you get it back to them in a timely manner. You don’t want the rate lock period to expire or come across any other setbacks.
So, if you take the time to understand first if you even qualify for a refinance, prepare all of your documents in advance, and know exactly what loan you want, you can take a lot of the headaches out of the process and you’ll feel confident in knowing you made the right decision.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I've refinanced a couple of times and the biggest challenge is often the fees. Your example about saving $100/mo against $2500 in fees was a good one. But when money is tight sometimes its tempting just to look at the monthly payment. Then there's the "no closing costs" offers. You can still compare interest rates & monthly payments, What "hidden" things should people look for with that type of mortgage?
Totally agree. You got to figure out first if this is for you. You also need to do a lot of research. Work with the people you can trust and you are comfortable with. It would be a plus if you can find someone that is easy to talk to with regard to this matter so that you can express what you really want.
...and stay away from lenders that are aggressively pursuing you; odds are their fees are higher than if you do the homework yourself and find a good, local lender.
That's exactly right. If they quote you something the first time that doesn't jive with the current rate environment, chances are they are going to just be aggressive while trying to sell you on how they can help you out to bring the rate down so that it seems like they are doing you a favor or giving you a deal. In the end, all you're probably doing is paying higher origination fees, buying points, etc.