5 tips for refinancing a mortgage today
The lowest rates in decades are enticing, but do your research to make sure you're really better off with a new loan.
© Jb Reed/Bloomberg via Getty Images
Fears of a "double-dip" recession and the possibility of a widening European debt crisis have lowered U.S. mortgage rates to levels not seen in more than half a century.
Thirty-year fixed-rate mortgages continued their fall in September, landing at just a tick over 4%. That's the lowest level in nearly six decades, according to home-loan giant Freddie Mac. (Bing: More refinancing information)
Even if rates rebound a bit this month, experts say it is a great time for qualified homeowners to refinance.
"Record-low rates mean lots and lots of people could realize substantial savings by refinancing," says Erin Lantz, director of real-estate website Zillow.com's Mortgage Marketplace. "That's not the case for every single homeowner, but I'd still encourage consumers to take the time now and look into refinancing."
True, banks have tightened lending standards since the U.S. housing boom's easy-credit days, when it seemed as if anyone could get approved for anything.
But Lantz says a little bit of calling around should turn up a lender who will OK your application, especially if you have at least 20% equity in your home and a 740 credit score or better.
"There's a good chance that there's a way out there for many homeowners to qualify for today's record-low rates," she says.
Here are five things Lantz says homeowners looking to refinance should do:
Tip No. 1: Shop around.
Mortgage rates vary widely, so experts recommend doing lots of research before settling on a deal.
"We're seeing an increase (in) pricing disparity between lenders, which means it's more important than ever to shop around for your loan," says Mona Marimow of mortgage website LendingTree.com. "Rates can vary by 1% or more from lender to lender, translating into a difference of about $140 per month on a $250,000 loan."
Lantz adds that consumers should look at more than just rates.
"Fees and the quality of service that you'll receive from different lenders vary, too," she says. "So you should always do your research -- reading reviews and comparing rates and fees in advance so you're ready to lock in when rates hit the level you're looking for."
Popular websites for mortgage information include Zillow, LendingTree and Bankrate.com. You should also check with lenders in your area, and ask friends and relatives where they got their mortgages and whether they'd recommend their lender.
Tip No. 2: Figure your break-even point.
Today's low rates are great, but they're not for everyone.
People who already have mortgages with fairly low rates might consider skipping a refinance, as a new loan typically carries thousands of dollars in closing costs.
"It's not as simple as saying, 'I've got a 5% mortgage and rates have dropped to 4%, so that's a better deal,'" Lantz says. "You have to think about things like what your closing costs will be and how much longer you plan to stay in the home."
A good rule of thumb: Refinance only if you can cut your mortgage rate by 0.5 percentage point or more from what you're paying.
Lantz also suggests doing a careful analysis to calculate your break-even point -- how many months it will take to recoup your closing costs. You can do this with a pencil and paper, but mortgage-oriented websites often have online calculators to make the job easier.
Article continues below
Tip No. 3: 'No-closing-cost' deals really have closing costs.
All mortgage refinancings, even those billed as having no or low closing costs, charge you in some fashion for loan expenses.
"When it comes to refinancing a mortgage, there really is no such thing as a free lunch," Lantz says. "Even if you see an ad that says, 'No closing costs,' there are still costs that you pay in one form or another. So you should ask your lender to show you all of the options available to you."
Closing costs typically total about 1% of your new mortgage's principal, covering such things as home appraisals and lawyer's fees.
But there are several ways lenders work these fees into refinancing deals, including:
- Upfront charges. The traditional way of paying for closing costs, this method involves simply bringing a certified check to your mortgage closing to cover expenses. The lender will usually tell you a day or so ahead of time how much money you'll need.
- "Rolled-in" closing costs. With this option, the bank adds all closing costs to your new loan's balance rather than making you pay upfront. You won't spend any money out of pocket, but you'll pay slightly higher mortgage bills each month throughout your loan's lifetime.
- No- or low-cost refinancings. These deals don't charge you any closing fees, but they carry higher interest rates. That compensates the lender or mortgage broker for "eating" your new loan's closing costs.
Which option to choose depends on your circumstances.
"As long as you understand that there are always closing costs involved in a refinancing, you can simply ask your lender to lay out all of the different scenarios and pick the one you like the best," Lantz says. "It's really a question of which method works best for you."
Tip No. 4: Consider a 'cash-in' refinancing.
Remember "cash-out" refinancings?
Those were the deals in which homeowners refinanced existing mortgages during the housing boom for larger loans and walked away with thousands in cash, pulling out some of the equity they'd built up because property values were soaring.
Well, today's housing bust has boosted interest in the opposite kind of deal: the "cash-in" refinancing. That's where homeowners swap existing loans for smaller mortgages instead of bigger ones, bringing cash to the closing table to make up the difference. Hence the term "cash-in."
Lantz says cash-in deals allow consumers whose property values have plummeted during the housing bust to increase their home equity to 20%, the minimum that many refinancing deals require.
"If you can bring a little cash to the table and push your equity up, people who otherwise couldn't qualify can take advantage of today's low rates," Lantz says.
Tip No. 5: Get a rate-lock confirmation.
Today's historically low mortgage rates have left many lenders swamped with refinance applications, so it's important to have your bank lock your rate in writing.
Most lenders will send you a "rate-lock sheet" by fax or email upon request, confirming the mortgage rate you're getting and spelling out when the rate lock expires.
"The idea is to hold your lender accountable for the rate commitment they're making," Lantz says. "You also want to show the lender that you're an educated and informed consumer."
Lantz recommends asking for at least a 60-day rate lock in today's busy refinance market, and quizzing banks to make sure they can close your deal before the lock period expires.
How about the years you will add to the mortgage????
If you refinance for a new 30 year loan after 4 years you actually add 4 more years of payments, and don't forget it takes 21 years to pay off 1/2 off the actual loan because of all the interest is charged up front.
Refinance after refinance will keep a homeowner in a perpetual state of debt.
Try this site: www.bankrate.com/calculators/mortgages/refinance-calculator.aspx
It is an easy-to use calculator for refi expenses and payback.
I need opinions: I have 23 years left on my 30 yr loan, owe $65,000, with a current rate 5.75%. I spoke to my lender last night about refinancing to a 15 year loan at 3.5% taking my monthly payment up an extra $30 a month. Should I continue on or keep things how they are and just pay extra each month to the principal?
I don't want to stay in the house forever, but don't see moving anywhere in sight.
Your advice is appreciated.
Charles M, the reason banks won't do that is they usually don't own the loan, some investor or group does, and they call the shots. Why would they accept less when the full amount of the loan, not the home's actual value, is covered by mortgage insurance? If they foreclose, the mortgage holder gets full reimbursement from the insurance company. That's why the banks are so quick to foreclose - it's win/win for them: The banks make their money off the foreclosure sale plus whatever interest you paid them, the investor gets their money back from the insurance company, and the homeowner is out on the street.
How do I know this? Because BofA is foreclosing on our home right now, and we have fought to keep it but they will not work with us because the lienholder says no - full payment or nothing. If my wife can't find a job by February which pays enough to cover the mortgage (I still work but don't make enough), then we will join the millions who have lost their dream due to these practices. They don't care about the human factor, just the money. As long as greed rules the financial and political spectrum, this will continue to be the case.
Some of this is good advice but do not waste your time with Zillow, LendingTree and Bankrate.com.
These are not lenders they are aggregators and will only put you in touch with lenders that pay them to send them leads.
Call your existing lender first.
get a referral from a friend, relative or a known real estate professional.
Don't go anywhere on line.
Check your local lender that will service the loan so you don't end up having to call india when your escrow account is a mess.
Don't pay attention to the new good faith estimate. it is confusing and a disaster. it does not reflect the payment or cash to close if applicable. ask your lender to provide the good faith in the old format. much easier to understand. get your rate lock in writing.
urlemmings, what exactly are you trying to say ? The lending business should be taken from banks and given to the people ? Who somehow deserve it ? How?
You're more than welcome to lend yourself money for a mortgage, and your neighbor too.
Just please don't entertain the thought that one simply has a right to other people's money.
This kind of moronic thinking will eventually get you shot