Thursday, 7 May 2015

Refinancing your mortgage can be just as stressful as applying for a mortgage the first time around.

How do you know if it's the right time to refinance, and what's the best way to go about it? If you're thinking about refinancing your mortgage, read our tips below to help you get started.

Is refinancing right for you?

Not everyone will qualify for a mortgage refinancing package. Review this list to see if refinancing could be right for you:

  • With dropping interest rates, you can pay less for your home over the course of your loan. The rule of thumb: only refinance if you can save 2% or more over your existing mortgage.
  • You may need a different type of financing. For instance, if you currently have an adjustable-rate mortgage, or ARM, that is ready to adjust (that is, the rate is due to go up), it may be beneficial to refinance into a fixed-rate mortgage.
  • Some mortgages come with a large balloon payment at the end of the term. If your financial situation has changed, refinancing into a more traditional loan product may be the right move for you.
  • How's your credit rating? Your credit score should be about 740 or higher to get a good interest rate; if it's lower, spend six months to a year paying down debt to make it stronger. Lenders want to see that you are responsible with your credit and live within your means. Never incur debt of more than 75% of your credit limit, as that will lower your credit score. Correct any errors in your credit report, including addresses, misspelled names, or inaccurate job histories.
  • Find out if there's a prepayment penalty on your mortgage with your current lender. If so, plan to close the new loan after that penalty date has expired.
  • You may face a challenge refinancing if you live in an area where property values have depreciated. Ask a realtor for a cost analysis on similar homes in your neighborhood.
  • How much will refinancing cost you? There will generally be an application fee, a home appraisal fee, and other closing costs. You might also need extra money if you choose to pay for "points" (a fee on your principal that guarantees you a lower interest rate). Add them up to get your true out-of-pocket cost.

The dos

  • Double-check the interest rate of the loan you are considering. Is it lower than your current rate? Is it fixed for the life of the loan?
  • If you're shopping for a lender with more favorable interest rates, don't forget to check with your current lender, as they may be able to offer the same terms.
  • Research what kind of mortgage is right for you—15-year, 30-year, fixed-rate, adjustable-rate—and the advantages and disadvantages of each.
  • Keep an eye on mortgage rates and "lock in" your rate. A "lock" is the tool your lender uses to commit to an interest rate. Talk with your lender to determine the lock term that allows enough time to close the loan (a refinance can take 4-6 weeks from application to funding) before the "lock" expires. Your lender should provide written confirmation of exactly when the rate expires and any penalty assessed if the lock is extended.
  • Shop around when choosing a settlement company or title attorney. Fees for closing vary; your lender may suggest a company to you, but it's always a good idea to shop around.
  • Find a qualified real estate appraiser. Your lender will schedule an appraisal from a pool of certified appraisers in your area.

The don'ts

  • Open up any new lines of credit, like an auto loan or credit card. Opening new lines of credit will lower your credit score.
  • Spend more than 25 percent of your monthly income on your mortgage. Spending a larger percentage can land you in financial trouble.
  • Refinance your home to pay off unsecured debts such as medical bills, credit cards, or utility bills.

Find a qualified real estate appraiser

Your lender will schedule an appraisal from a pool of certified appraisers in your area.

Refinancing your home is the second biggest financial decision you'll make. Before you sign on the dotted line, do your homework. 

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