Jonathan Carter

Getting From Here to There
on the Refinancing Highway

Preparing To Refinance Your Mortgage

 You're ready to start saving money by refinancing your home's existing mortgage, but the process may seem overwhelming. These basic steps will you prepare to take advantage of the current refinancing market.

First, make sure it's worth it

Do your homework.
Current interest rates vary from region to region, so search the Internet to learn about competitive rates in the area where you live. Pay attention to how different terms influence rates and what types of closing costs are attached.

That old thumb.
A long-standing philosophy about refinancing was that you should only refinance if the rate was 1.5 - 2 percentage points below your existing rate. That old rule of thumb no longer applies. A better gauge is to determine how much refinancing will save you each month compared to how much it will cost you. Remember that the larger your loan amount, the more you'll save with each percentage point.

By lowering your 30-year, $300,000 loan from 7 percent to 6.5 percent, you'll save $100 a month, and $35,000 in interest over the life of the loan.

You save…

Deciding on your terms

You'll definitely want to spend time talking with your mortgage broker to compare different terms before you commit to a refi.

The type of loan that's right for you depends on how long you plan to be in your house and how energetic you want to be in paying off the loan.

• If you've been paying on your current mortgage for 10 years, refinancing with a 30-year loan will indeed lower your monthly payments. But it will also add 10 more years of payments.
• A 15-year loan will reduce the total amount of interest you pay over the loan's life, but your monthly payments will increase.
• A 5- or 7- year ARM (Adjustable Rate Mortgage) provides a better rate than a 30-year fixed loan, however the interest rate becomes adjustable after five or seven years. But if you don't plan on staying in your house very long, a 5- or 7- year ARM with its lower initial interest rate would probably be your best option.

Get a handle on all your costs

Add them up.
There's a bundle of closing costs that may be attached to your loan including fees for a credit report, an appraisal and document preparation. Try to estimate the total amount of your fees and compare that to the differences among rates. And remember that almost all fees are paid at closing.

No-cost refi option.
If you've recently refinanced with closing costs and don't think you'll remain in your house for long, consider a no-cost refi. Although there are no up front costs, your interest rate will probably increase by one-quarter to one-half of a point. This is actually a popular option right now, especially for folks with larger loans, because the larger the loan, the smaller the penalty for no-cost loans.

Points.
If you plan on staying in your house for a while, think about paying points to lock in the best long-term rates. Points let you buy a better interest rate and cost 1/2 of a percent-to-1 percent of the loan. You pay for points up front. Just remember that rates are already pretty low. Paying points will add to the time that it takes to break even on your closing costs.

Find a broker to shop for you

The application process varies with each lender.
Many lenders pre-approve their existing customers and request minimum paperwork for a simple refi. Online lenders and brokers provide online application, will pull your credit report and return results to you on the same day.

Lock in.
Normally, lenders want you to lock in your rate after they've approved you and have received some sort of commitment from you, such as permission to do an appraisal. You'll want to lock the rate as soon as possible making sure the length of the lock-in period is adequate to get you through the whole process.

Be cautious of an offer for an extremely low interest rate with only a 10-day lock-in. It's better to select a longer lock-in period. If interest rates decrease many lenders will allow you to "float down" part of the way to the reduced rate. If rates decrease by more than half a point, lenders will often meet you halfway.

Go prepared

Before meeting with your broker or lender, gather your financial records together. Just what you'll need depends on your lender, what kind of loan you're getting and your particular situation as a borrower. Some loan programs provide streamlined refinancing and require a minimum amount of documentation.

Although you won't know you exactly what you'll need in advance, this list contains some of the documents that your broker and lender may request.

Finally…Closing!

Final details.
Prior to the official close on your mortgage, your lender may request more documents from you or send you more paperwork to complete. Respond as soon as you can so as not to delay the process. The sooner you close, the sooner you'll begin realizing the savings of refinancing.

The day arrives.
You will be required to be at the closing in person. Your mortgage broker should be there to walk you through this savings process again.