Refinancing

As the economy and job choices improve in the United States, you may be looking for ways to improve your personal circumstances as well. Refinancing your loan may be a smart way to enhance your financial position.

However, there are things to consider before taking the refinancing leap.

Pros

  • You can take advantage of equity that has built up in your home.
  • You can merge several, less advantageous loans into the refinance
  • You may be able to lower your interest rate, monthly payment, or term
  • You may be able to get out of a variable rate mortgage into a fixed rate refinance.

Cons

  • It is harder to qualify for a refinance than for an original mortgage
  • The application process and paperwork can be extensive
  • High closing costs and upfront fees
  • You may not see the super-savings advertisements promise

Important Considerations

What is Your Home Worth? If your community took a hit in the home crisis, your house might not be worth enough to justify a conventional refinance. There are other lenders and government programs that may be able to help with a refinance, but the field of options will decrease if your home value is strained.

What is Your Current Financial Situation? If you are encountering financial tension, a refinance might seem like the solution you need to move forward. However, if your credit score is low or your debt payments high, you will probably not be offered the best loan terms available. There may still be enough benefit from a refinance to make it worthwhile. It's important to crunch the numbers and make sure the terms offered will help move you forward financially.

What Will the Loan Cost? Many homeowners focus on interest rate and monthly payments only, and they are both essential concerns. However, there are other items to consider when calculating overall loan cost.

Refinancing your home can cost between 3%-5% of the loan amount. Many of those costs aren't evident because they are added to the loan or absorbed in a higher interest rate, and require no money upfront. They will cost you, all the same, in a higher loan balance, additional interest paid, or both.

Be on the lookout for these terms and phrases that can add to the cost of your refinance: points; PMI (mortgage insurance), origination fees, and accruals. There are also a host of “closing fees” that can add to the cost of your refinance, including appraisal fees, credit check fees, brokerage fees and more. If something is confusing, ask questions until you fully understand the actual cost of your loan.

Preparing for a Refinance?

Round Up Your Financial Records. Lenders will want evidence of your income and expenses before even offering you terms on a refinance. Be ready with recent pay stubs, tax returns, and bank statements. It is also an excellent time to pull your credit score, so you know what potential lenders are seeing.

Shop Several Lenders. If you are happy with your current lender, start with them. They may give a great offer to keep your business. But check different types of lenders, too. Consider banks, mortgage brokers, and credit unions.

Shop over a very short time span, however. Each one will check your credit score, and while multiple inquiries over a short period (about two weeks) are typically ignored, any longer time span may negatively affect your credit score.

Refinancing requires careful consideration and planning to determine if the move is right for your financial situation. If you feel a refinance is your best move, make sure to do your homework and research several options to find the refinance that is best for you.