In 2012 interest rates hit record lows and the government released new revisions to the Home Affordable Refinance Program (HARP) – this powerful combination has caused refinance applications to surge. Many homeowners realize that they could save a lot of money on their monthly payments by take advantage of the low rates, but there are other factors to consider as well.
- “You have to look at [a refinance] from the standpoint of: ‘How much is it going to cost me and how long until I can recoup those costs? That’s the secret to refinancing,’” says Don Frommeyer, president of the National Association of Mortgage Brokers (NAMB).
The good news is, with rates dipping below four percent for a 30-year fixed loan, there’s a good chance refinancing could make sense for you, according to the Mortgage Bankers Association’s June 12, 2012 “Mortgage Finance Forecast.”
Tip #1 – Check Your Credit Rating
If you don’t know what your credit score is, you might want to find out. Why? Because a bad credit rating could disqualify you from refinancing your home, or result in a higher interest rate on the loan you do qualify for.
“I think everyone should check their credit report once a year,” says Frommeyer. “You can do it for free online, and that way you know if anything has happened without you knowing, or if there’s something outstanding you forgot about.”
Outstanding balances, as well as a host of other credit issues, could lower your credit score and make a big difference when you refinance. If you’re credit score could use some work, check out this article about improving your rating.
Keep in Mind: Lenders typically use the Fair Isaac (FICO) credit score to check an applicant’s credit worthiness, says Frommeyer.
- FICO scores range from 300-850 – higher is better.
- Individual lenders may decide their own standards for what’s risky and what’s not.
- According to FICO, some things you can do to improve your credit score include setting up payment reminders and reducing the amount of debt you owe.
Tip #2 – Know What Your Home is Currently Worth
As you probably know, the housing market fluctuates – sometimes by surprising amounts. And that could be a good or bad thing when it comes to your home’s value. But what does this have to do with refinancing? It’s important to have an accurate idea of your home’s worth because the value could affect your loan rate when you refinance.
Generally, the higher the value of your home, the better the rate for the same amount borrowed.
Keep in Mind: There are a few ways to determine the wealth of your home:
- Check the assessed value on your most recent county tax statement; it’s usually reassessed every few years.
- Get a professional appraisal. (Note: The lender will eventually do this.)
- Check comps (prices of homes similar to yours sold or for sale in your area) on the Internet. (Note: This is the least accurate since no home is exactly like yours.)
Tip #3 – Choose a Short Loan Length, If Affordable
When you refinance, you can opt to switch to a shorter-term loan.
The benefit? When you have a short-term loan, more of your monthly payment goes toward principal (the amount of money you borrow) as opposed to interest (the amount you are charged to borrow the money). When the principal is paid off, no more interest is charged – i.e., the loan is paid off.
So, on a 30-year loan for roughly the first 15 to 17 years, your monthly payment is mostly interest. But in a 15-year loan, after the first five years or so, you will likely be paying more principal than interest with each monthly payment.
Keep in Mind: Here are some things to consider about loan durations.
- In addition to 15- and 30-year loans, there are 20- and 25-year terms.
- Although your interest rate might be lower with a shorter loan, your monthly payment might be higher because you must pay off the principal, and interest, in a shorter amount of time.
- Make sure you factor in future expenses like home repairs and college tuition for your kids when deciding on the term length. You want to make sure you can afford – and sustain – the monthly payments.
Tip #4 – Shop Rates When Refinancing
While refinancing rates fluctuate from lender to lender, don’t expect wildly different interest rates. Rates are the lowest they’ve been in 50 or 60 years, so every lender is going to be within an eighth of a point because it’s so competitive.
Keep in Mind: More shopping tips…
- When looking for a mortgage professional, get referrals if possible.
- Always give the exact same information when checking rates so the comparison is meaningful.
- Remember that there are plenty of mortgage professionals and plenty of lenders out there, so make sure you are comfortable before you make a final decision.
Tip #5 – Don’t Automatically Go With the Lowest Rate
Now that we have advised you to be aware of rates and look for the best option, we have to warn you not to make it your only concern. There is a lot more that goes into a loan (both the service and the cost) that cannot be determined by rent alone. Sometimes the wholesale loan dealers can crank out better rates than a boutique mortgage bank, like Samuel Scott, has to offer. However, these companies often find other places to put in hidden costs and very often customer struggle with timelines and service.
For instance, you might enjoy a lower interest rate, only to find out that your closing costs are exceptionally high. Or you might pay a slightly higher rate, but have the option to buy down the rate with points and save money over the life of the loan. There are so many intricate details that go into packing a home loan, it’s very important to work with an expert. Our Mortgage Advisors are trained to tailor residential loans to each client’s needs. Rather than selling rates only, we find a complete solution that makes sense for real people.
Keep in Mind: Here are a few other tips…
- Factor in that more interest means more of a tax break – you can write off interest paid, but not principal paid.
- Generally, the shorter the term of the loan, the lower the interest rate – a 15-year loan usually has a lower rate than a 30-year loan.
Tip #6 – Check for Prepayment Penalties
Let’s say you win the lottery a week after you refinance and suddenly feel the urge to pay off that new loan. Okay, that’s probably a long shot. But you could decide to refinance again or sell your home in the future. If so, the last thing you want is a penalty for paying off your loan early, which is what a prepayment penalty is.
And there are many types of prepayment penalties you should be aware of. Some go away or lessen over time, say, after three, five, or 10 years. Some always remain. It depends on the lender.
But here’s the good news: At Samuel Scott Financial Group, it is very very rare for any of our home loan refinances to have a prepayment penalty. We work hard to secure products for our clients that will give them a sound financial plan that allows flexibility.
Keep in Mind: Here are a few things to keep in mind about prepayment penalty loans:
- Federal Housing Administration (FHA) loans, which are typically for lower-income Americans, carry no prepayment penalties.
- Neither do conventional loans through the Federal Home Loan Mortgage Corp. (better known as Freddie Mac) and the Federal National Mortgage Association (Fannie Mae).
- Be sure to read your loan documents; they must specify any prepayment penalties. Or ask your Mortgage Advisor in advance to let you know of any prepayment penalty fees.
Tip #7 – Get a Loan Rate Lock Confirmation
So you’ve done all your homework and finally decided on which loan you want. That’s great, but you’re not done – yet. As a final step, you’ll want to “lock” your loan, which guarantees the rate you will get.
This means your rate can’t change, even if the market does. When you decide to lock your loan, and by extension, your new rate, you should ask your Mortgage Advisor to give you written confirmation.
“Get a copy of the lock confirmation in case there’s ever any question ,” Frommeyer says.
Keep in Mind: Here are some important points about locking a rate.
- Frommeyer recommends deciding on a rate that you will be happy with, no matter what. Why? Because if rates go down after you lock your loan, you don’t want any regrets.
- A reputable Mortgage Advisor always asks you to make the final call on whether to lock a loan. After all, it’s your money.
This article was adapted from a post By Terence Loose. Check out the original article here: http://homes.yahoo.com/news/refinancing-tips-from-experts.html