Depending on your specific circumstances, refinancing your mortgage can make a lot of sense. If the mortgage rate happens to fall, you could end up saving hundreds or even thousands of dollars over time by refinancing. Many homeowners, however, do not even realize that refinancing is a choice. If the mortgage rate drops, here are the steps you should take to refinance your mortgage.
Read Through your Original Mortgage Agreement
You may not realize it, but most mortgage agreements include a clause about refinancing. Most mortgages can’t be refinanced for at least a year, and there may be penalty fees associated with refinancing, depending on your lender. Before you decide whether refinancing is worth the money, make sure that you take into account the associated fees to cancel out your original mortgage.
Research Mortgage Companies for the Best Rate
There is no rule that says that you have to refinance with your current mortgage company. Usually, that is the easier choice, but you can check out other mortgage companies too. Compare companies based not just on interest rate, but also closing costs, terms, and other parts of the contract. Remember, however, that some mortgage companies charge additional fees to transfer the mortgage to another company.
Understand and Budget for Closing Costs
Closing costs can be expensive. When you refinance, you will have to repay many of the closing costs you paid the first time around. Although some charges, like title transfer fees, may not apply, you will have to pay underwriting, document preparation, and other costs again. If you do not have the money to pay for closing costs upfront, you can sometimes add them to the total mortgage, but in general, this is a bad idea, since you will end up canceling out the money you will save by refinancing.
Calculate the Cost of Refinancing Versus How Much You Will Save
Typically, the mortgage rate has to drop at least a percentage point for it to be worth you money to refinance. Start by calculating the cost of the mortgage using the new interest rate and compare it to the cost of your mortgage, in total, now. How much money will you save? Compare that total to the amount you will pay in fees and closing costs when you refinance. Although you can save money, sometimes the costs outweigh the benefits.
Consider Changing the Terms of your Mortgage
When you refinance, you are basically creating an entirely new mortgage agreement. Your interest rate is not the only aspect of your mortgage that you can change. You can also change the term of your loan, spreading out your payments over more years so that your monthly payments are lower, or you can consider cashing in on some of your home’s equity if you need a little spending money. Consider this a completely new mortgage and make a wish list. Just make sure that you do not make so many changes that refinancing is not a financially good idea anymore!
Work Closely with your Mortgage Lender
The process of refinancing your mortgage is not overly difficult. Essentially, after you have been approved, all you have to do is sign some papers, just like you did with your first mortgage. Be prepared, however, to pay for your mortgage’s closing costs at this stage of the process, and bring your original papers, title information, and identification in case your mortgage company needs those documents.
Make Copies of your Paperwork and File Accordingly
The refinancing process can be stressful, and it is easy to get home and throw the pile of papers on your desk to collect dust. Resist the urge! If you ever refinance again, have a problem with your mortgage lender, or otherwise need the documents, you do not want to have to dig around your house in a panic trying to find them. Instead, make copies of everything and file them accordingly, giving the relevant information to your accountant if you have one. You should also keep a copy of anything important in a fire-safe box, just in case.
Once you refinance, you may not be able to do so again for a long time (if ever). Refinancing is expensive for you, since there are so many fees to pay, and whenever you secure a lower interest rate, your bank loses a little money, and so they do not allow consumers to constantly refinance. Try to hit the mortgage rate when it is at its bottom so that you do not have to continually watch the rate drop as your stuck with a higher rate. In short, do your research. Before refinancing, look at trends, real estate market news, and advice from the experts to determine whether or not refinancing really is a good choice for you. Refinancing can be a great option, but it is not for every homeowner.
Wesley Pritchard is a freelance writer who writes about the mortgage industry, often focusing on a specific topic such as
mortgage rates.
