Refinance the Right Way
Sure, market rates are lower than what you pay on your mortgage. But does it make sense to take the plunge?
March 28, 2003
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If you're paying a higher-than-market rate on your mortgage, you may be a prime candidate for refinancing.
Some refinancers have reduced their monthly payments and are saving (or spending) the difference. Others are accelerating the day when mortgage payments end by choosing a 15-year loan -- locking in a lower interest rate but also higher monthly payments. Still others have traded in their mortgage for a bigger loan balance and some extra cash.
Even small differences in interest rates can add up over time, especially on larger loans. On a $250,000 30-year mortgage, for example, the difference between 7.0% and 7.4% represents about $850 in interest payments each year.
Step 1: Where are you with your current loan?
Refinancing isn't for everyone. If you're ten years into a 30-year mortgage, for example, extending the term for a lower rate may not add up. And raising your monthly payments to pay off the loan sooner may not be in your budget.
Similarly, if you've just gotten your first mortgage, the expense of a refinancing may not make sense unless you plan to stay in the house long enough for the interest-rate savings to compensate another round of origination and closing costs. Use our calculator "Am I Better Off Refinancing?" to help you determine if a new loan makes sense.
Double-check your property's value, too. Some lenders won't lend more than 75% of a home's value when you refinance for more than the balance on your current mortgage. But if prices have gone up in your neighborhood, you may have more equity than think. Visit Domania.com's home check tool to find out what homes in your neighborhood sold for recently.
Step 2: Check with your current lender
Check first with your current lender to see whether it offers lower rates to its customers. Lenders might be willing to lower your current rate for a small fee to keep you happy. The key is whether the lender has held on to the original loan or sold it on the secondary market. If the loan was sold, then you'll have to go the traditional refinancing route.
There are several advantages to continuing your relationship with your current lender:
- You may not need a new home appraisal when refinancing into a fixed-rate loan with the same lender -- provided the lender vouches that the property hasn't lost value since the original loan was made.
- A full-blown credit report isn't necessary -- just a check of your existing electronic credit file and a simplified income verification.
- Your mortgage payment record must be good but not necessarily perfect.
- And you may be able to roll up-front refinancing costs into the new loan.
Step 3: Shop around
But the bottom line is the best package for you. A comparison of annual percentage rates (APR) should be your main focus.
You can use the Mortgage Finder to find the cheapest rates in your area. You can also find national averages for comparison. The numbers are provided by Bankrate.com and may be different than what's advertised at your local branch. Search results include only banks, thrifts and mortgage brokers that offer online origination and may require the payment of up to 3.5 discount points. Points are essentially up-front interest payments. The more points you pay at origination, the lower your interest will be over the life of the loan.
Step 4: Lock in
Once you've narrowed your choices to two or three lenders, start placing calls or visit their Web sites for information on fees and requirements. Then compare which lender has the better loan.
Consider locking in your rate. This guarantees you the rate quoted at the time of application -- often 45 to 60 days -- in exchange for a fee. The longer the lock-in period, the higher the fee you'll pay.
For more details about mortgages and refinancing, visit the refinancing section of the Home Buyers' Survival Kit.