Coming out of the financial crisis, millions of homeowners refinanced their homes with record low interest rates. (Well, those who could, at least.) Refinancing accounted for more than half of all mortgage applications from mid-2009 to early 2011. But, even under the temptation of low rates, refinancing isn't always a no-brainer. Here's how to figure out if it's a good move for you:
Check the payoff. Even with a lower rate, a new mortgagee isn't always the best move.
- Time at home. One bit of conventional wisdom claims if the refinance interest rate isn't at least one percentage point below your current rate, it doesn't make sense to refinance. This is most relevant if you don't expect to be in your current home much longer. It's not worth the closing costs or taxes if you're only going to stay in the house for two more years.
- No debt reduction. Refinancing doesn't get rid of debt it just restructures it. So it's important to weigh your overall savings against the time it will take to compensate for the cost of refinancing, which usually ranges from 3% to 6% of your outstanding principal amount. You can test scenarios using our Refinance Calculator.
Set your expectations. Refinancing can save you money in the long run, but it's not a cure-all, and it doesn't happen quickly.
- New safeguards means more time to refi. In the post-financial crisis world, there are more precautions in place to deny fraudulent refinancing. While that's good news generally, it means more paperwork, and probably a longer time to closing, for a legitimate refinancing. So gather as much documentation as soon as you can and be patient.
- Consider mortgage length. If you're only going to stay in the home for only a few more years, an adjustable-rate mortgage with a favorable cap on interest rate increases may be an option to consider. But, if you want security, a 15 or 30-year fixed-rate mortgage is a better bet for mapping out fixed payments.
Shop around. Prices, rates and packages will vary from lender to lender.
- Don't discount your original lender. The company may waive some of the costs of refinancing, and it could be a speedier process, since the lender already knows your history. Still, there's a chance that you might not get a competitive rate, so only approach your current lender after you know what others are offering.
- Try an upfront mortgage lender. Upfront mortgage lenders (UMLs), such as Amerisave or National Mortgage Alliance, disclose their fees upfront, allowing you to shop anonymously by entering minimal personal information at their websites. This makes the shopping process less stressful and helps avoid making you the target of refinancing solicitors. Of course, when shopping around, be sure to check the credentials of the lender, to make sure the firm is up to date with current regulations.
- Ask a mortgage broker. If you don't want to deal with a slew of lenders, mortgage brokers are an alternative. A broker could be able to get you special packages or unique loans from wholesale lenders. But make sure the broker is knowledgeable and that his or her fees aren't excessive. There are also upfront mortgage brokers.
What not to do when looking to refinance your mortgage:
- Don't go with the loan provider who solicits you. Homeowners should be weary of lenders who come knocking at their door. Rather, select a lender when the time is right for you instead of allowing a lender to convince you it's time to refinance.
- Don't over-emphasize monthly payments. What you pay each month isn't as important as what you owe. It's easy to get distracted by a lower monthly payment. Remember to consider the extended payment period and the total cost over the long run.
- Don't make big changes. Once you enter the refinancing process, it's important to maintain the status quo, credit-wise. Lenders have eagle eyes when it comes to monitoring credit and even a $100 purchase that's out of the ordinary could derail refinancing.
For more reading: National Mortgage Alliance has several resources at its website, including a refinance breakeven calculator. Do a cost-benefit analysis with online calculators at LendingTree. The Mortgage Professor offers a host of calculators to run refinancing scenarios based on specific situations.