Your 6-Step Mortgage Refinance Guide

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The Mortgage Refinance Guide will help you understand the steps you need to take to get your best refinancing deal. Are you planning to refinance your home mortgage? With interest rates at historic lows, refinancing your mortgage could save you thousands of dollars over the life of the mortgage.

If you are paying a high interest rate, you should take advantage of the opportunity to lower your payments. Even if you have an ARM (adjustable rate mortgage), and you are currently paying low interest rates, there is a good reason to refinance your mortgage. When interest rates start to rise again, your ARM rates will also go up. If you switch now to a low interest rate fixed mortgage, then your rates will stay low for the life of the mortgage.

Home refinancing is a major commitment, so it is important to make a careful decision. Compare several offers from different lenders. If there are any fees or anything that you are unsure of, ask to have them clarified. you might want to seek the advice of a mortgage counselor and other financial professionals.

Next: Step One: Is Refinancing the Right Option for You?

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Step One: Is Refinancing the Right Option for You?

Here are a few reasons that you might want to refinance your mortgage.

1) Get a lower rate. With rates at historic lows, you can get a lower interest rate on a fixed loan. Or, if you want to keep your ARM, you may be able to get a lower cap on the rate.

If you did not have an excellent credit score when you first took out your mortgage, and your credit rating has improved, then you should be able to get a lower interest rate by refinancing.

2) Cancel your private mortgage insurance. If your house has increased in value, your home equity may exceed 20%. First ask your current lender for a new appraisal and to have the insurance cancelled. If the lender is reluctant, then by refinancing your home, you can eliminate this insurance.

2) Build home equity faster. If your finances have improved, you might be willing to make a higher monthly payment in order to pay off your mortgage more quickly. This can save on the total interest payments over the life of the loan. Alternatively, you can make additional payments each month without refinancing. Ask your lender how this will affect the cost of your loan.

3) Lower your monthly payments. There are two ways that refinancing can cut your monthly payments. First, if your interest rate is reduced, your payments will go down. Secondly, you can extend the length of your mortgage (for example, from 15 to 30 years) so that your payments are reduced.

4) Cash-out refinancing. If your home has increased in value, cash-out refinancing allows you to turn some of your home equity into cash. This will be secured by the value of your home. Some reasons that people do this are for major expenses, such as children’s college education; to consolidate your debts; or to combine first and second mortgages.

Note: Some financial experts advise against using your home to consolidate debts such as credit cards, even though you may be able to get a lower interest rate. Credit cards are unsecured debt, whereas your home is a secured debt. Before making major financial decisions, it is always wise to seek the advice of a financial expert.

Since there are some fees and costs involved in refinancing, if you are planning to sell your home in a year or two, it may not save you money to refinance your mortgage. You will want to determine your break-even point to see if you will save money (see Step 4: What Is Your Break-even Point?)

Next: Step 2: Do You Know Your FICO Credit Score?

Previous: 6 Steps to Home Refinancing Guide

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Step 2: Do You Know Your FICO Credit Score?

1) Find out your FICO credit score and review your credit report. Ideally, you want to check your credit score a year in advance of taking out a mortgage. This will give you time to work on improving this all-important number.

It is essential to have an excellent credit rating in order to get the best interest rates and terms for your mortgage refinancing. If you have an excellent score, then you could save thousands in lower interest rates on your new mortgage. If your score is less than 720 or 740, then you should take measures to increase your score.

2) Is your credit score not quite as high as it should be? There are several measures you can take to improve your credit score in as little as 30 days, although it is best to start these improvements a year in advance.

First, make sure that you pay every single bill on time. Late payments knock points off your credit score, but if you make all your payments on time, your score will bounce back quickly.

Also, if you carry a balance on any single credit card of over 30% of the card's limit, then it is lowering your score -- make every effort to reduce that debt. However, do not close any credit cards, as this actually lowers your credit score. If you have cards that you are not using, then use them at least every few months so that the banks do not close them from their side.

Note: While most financial experts say to keep your credit card balances below 30% of your credit limit, members of the FICO forums have noted that when your balance exceeds 9% of the card limit, it starts to affect your score.

3) Even if your credit score is not sterling, do not feel that buying a home is impossible. You may still be able to buy your home, although you may have to pay a higher interest rate.Talk to several lenders about your options. Ask them how much lower your interest rate will go if your score is higher. Then you can make an informed choice about whether or not you should wait to apply for a home refinancing loan.

Next: Step 3: What will the lender look for?

Previous: Step One: Is Refinancing the Right Option for You?

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Step 3: What will the lender look for?

1) The lender will review your personal finances. These include things such as your income and your other loans. The lender will also review your credit report and credit score.

2) The amount of debt that you carry. Normally, lenders look for a debt-to-income ratio of 38%, although some will allow a larger debt. Many factors go into your DTI ratio, so it is best to ask a lender to do this for you. If you have a high debt, by paying some of it off, you may get a better interest rate. Be sure to ask your lender if this is the case.

3) Your loan-to-value (LTV) ratio. This is an easy figure to determine. Take the amount that you want for your loan and divide it by the current value of your home. Usually, you will be allowed to borrow up to 80% of the value of your home, although some lenders will allow you to borrow more. There are two exceptions: FHA loan refinancing and refinancing of loans that are owned or backed by Ginnie Mae or Freddie Mac.

Lenders look at all these factors, and it is wise to speak directly to lenders to find out the best loan for you.

Next: Step 4: What Is Your Break-even Point?

Previous: Step 2: Do You Know Your FICO Credit Score?

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Step 4: What Is Your Break-even Point?

Do you know how to determine your break-even point on your loan? This is the point in time when you actually start to save money with your mortgage refinancing. Here is how to tell:

A. There will be fees and costs associated with the loan. Total up these costs.

B. Determine your monthly savings. This is the difference between your previous mortgage and your current one.

C. Divide the fees and costs by the monthly savings. This gives you the number of months it will take to realize your savings.

However, remember that there are other factors involved. For instance, if you change the length of your mortgage, your monthly payments will change. Some fees and costs may be added to the principal rather than being paid up front. Finally, if your home has appreciated in value, it may be possible to cancel private mortgage insurance, which will give additional savings.

Your loan officer may be able to give you additional advice regarding your break-even point.

Next: Step 5: Compare and Negotiate for Your Best Home Refinancing Offer

Previous: Step 3: What will the lender look for?

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Step 5: Compare and Negotiate for Your Best Home Refinancing Offer

Don’t be afraid to make lenders and brokers compete with each other for your business by letting them know that you are shopping for the best deal.

1) Go to your current lender to find out their offer. If you have a good track record, the lender may be more inclined to eliminate or reduce some fees for you. Especially if your mortgage is relatively recent, the bank or mortgage broker may be willing to waive the application fee as well as fees for the title search, for inspections and for property surveys.

2) Next, compare offers from several mortgage lenders. Don't simply stop with your current lender. There may be even better deals out there. Seek several offers. Be sure to look at interest rates, all fees and closing costs to find your best deal.

Do your shopping by going to local banks, checking newspaper ads and using online mortgage services. Many online services such as Lending Tree will give you offers from several lenders in a matter of a few minutes.

Important Tip: When reviewing home loan ads, remember that they usually quote the lowest rate for people that have high credit scores. They may promote a low introductory rate that goes much higher after some months. If the APR is much higher than the introductory teaser rate, then it is likely that your monthly payments will increase.

3) Check interest rates often. If you take several days or a few weeks to make your loan decision, check rates several times. As market conditions change, banks and mortgage brokers change their rates frequently. Take advantage of a dip in rates to lock-in your loan. These dips can disappear in a matter of hours.

Important Tip: Some mortgage brokers will work with you to find these dips in interest rates.

Important Tip: An interest rate lock-in is a great way to get the best interest rates. But what happens if interest rates go lower? Then you are locked-in to a higher rate, and you miss out on the opportunity. If this happens, you can still negotiate with your lender for a compromise rate.

4) Fees. Ask your lender for a break-down of all fees and costs.

By law, a lender has three days after receiving your application to give you a Good Faith Estimate, which gives an estimate (not an exact quote) of many of the fees that you will have to pay.

Also, ask for a detailed estimate of the closing costs. You can ask for a copy of the HUD-1 settlement cost form one day before you are due to sign the final documents.

5) Make a Home Refinancing Comparison Chart. Vertically list the interest rate, fees, insurance and all other costs. Then horizontally across the top, list each lender. Fill in their rates and fees. This will let you see at a glance the differences in rates and fees between the different lenders that you contact.

6) Especially look at the APR or annual percentage rate. This rate includes all fees and costs that will be charged over the life of the loan. So the APR serves as an excellent comparison guide between loans.

Important Tip: Not every lender includes all fees and costs in their APR. So be sure to get an itemized list and compare lists between lenders. This will allow you to do a more accurate comparison.

7) Negotiate. Bargain with each lender to get their best offer. Interest rates and fees are negotiable, but you must take the initiative from your side to ask for a better deal. You should call each lender and ask for a better offer. They are competing for your business and will be happy that you gave them an opportunity to do business with you.

Are you shy about this? Many people are. If you fit into this category, then ask a good friend or a financial advisor to negotiate for you.

Important Tip: Mortgage brokers have arrangements with multiple lenders, so they can get you good deals. But remember that unless you have hired the broker, then they are paid a commission by the lender. So they might steer you to the offer that gives them the most income, rather than the offer that gives you the most savings. Always compare several home loan refinancing offers and negotiate for a better deal.

8) Consider speaking with a financial advisor, housing counselor or your lawyer for advice and to make sure that you are receiving the best home refinancing offer.

Next: Step 6: Closing Your Home Refinancing Mortgage

Previous Step 4: What Is Your Break-even Point?

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Step 6: Closing Your Home Refinancing Mortgage

Before you make your final decision as to which loan offer to accept, take the time to double-check all the different lender offers, so that you feel confident that you are getting your best loan deal. Call the lenders one last time to give them an opportunity to give you a better deal.

Before paying any kind of a non-refundable fee, get the loan information in writing. Review it carefully and ask the lender questions about anything that is unclear to you.

When you feel that you have found the right lender, you can ask for a written mortgage lock-in, which means that the lender is making a rate commitment to you. Before you sign for this, be sure your lender has explained any costs or obligations.

Closing a home refinancing is much easier than when you purchase a home. You will need to have an appraisal of your property.

Finally, be sure that you carefully review all the paperwork before you sign.

Back to: 6 Steps to Home Refinancing Guide Introduction

Previous: Step 5: Compare and Negotiate for Your Best Home Refinancing Offer

Use this mortgage refinance guide to help you find your best refinancing offers. Even a small reduction in interest rates or fees can save you thousands.

I: How to Choose a Credit Card

II: Balance Transfer Credit Cards

III: Best Cash Back Credit Card

IV: Rewards Cards

V: Business Credit Cards
VI: Student Credit Cards

VII: Credit Card Debt Articles

VIII: Credit Report Guide

IX: Identity Theft Guide

I: How to Choose a Credit Card

II: Balance Transfer Credit Cards

III: Best Cash Back Credit Card

IV: Rewards Cards

V: Business Credit Cards
VI: Student Credit Cards

VII: Credit Card Debt Articles

VIII: Credit Report Guide

IX: Identity Theft Guide

I: How to Choose a Credit Card

II: Balance Transfer Credit Cards

III: Best Cash Back Credit Card

IV: Rewards Cards

V: Business Credit Cards
VI: Student Credit Cards

VII: Credit Card Debt Articles

VIII: Credit Report Guide

IX: Identity Theft Guide

VI: Student Credit Cards

VII: Credit Card Debt Articles

VIII: Credit Report Guide

IX: Identity Theft Guide

Your 6-Step Mortgage Refinance Guide

Mortgage Refinancing