EchoBay Expert: I realize I need to refinance my home while rates are lower than what I currently have but I haven't started looking for a new loan yet since house refinancing seems so complicated and I don't want to make a mistake and get a bad deal. What are some tips I need to know before calling a mortgage broker or doing an online mortgage refinance?
Loyal Reader: House refinancing can be a time consuming experience. But you can come out on top by following a few simple tips.
1. Compare, compare, compare!
When you are shopping for a house refinancing loan, you need to be comparing all aspects of the loan - interest rate, terms and fees. There are thousands of lenders out there and with online lenders, it is even easier to shop for a loan. Be sure you know what is available before you decide on the best loan for you.
2. Don't shell out for an appraisal just yet.
Many people have to pay PMI on their loan because they didn't put down 20% when they purchased their home. For these homeowners, once equity has been built, refinancing just to rid your loan of PMI can create great savings. But before you order an appraisal, talk to the appraiser first.
Although the appraiser cannot guarantee a value, they can give you a general idea of the value of your house. If there's a possibility you could still end up paying PMI, you may want to wait a little longer to refinance. There is no sense in paying an appraisal fee of several hundred dollars only to be told you still don't have 20% equity.
3. Refinancing for the same term.
Some jump at the chance to refinance when rates drop and in most cases, they should. But if you've already been paying on your home for several years, you should consider refinancing for a shorter term. Why? With a lower balance and a drop in interest rates, you could keep your payment the same or maybe even lower, while shaving years off of your repayment. If you refinance for the same term, you will save now but in the long run you will pay much more in interest.
4. Calculate the breakeven point.
You need to decide how much longer you will be in your home. Once you know this calculate the difference between your old mortgage payment and your new mortgage payment. The total of the closing costs divided by the difference in your payment will give you your breakeven point.
Let's assume your old payment is $900 and your new payment is $775 with closing costs of $2,500. Divide $2,500 by $125 ($900-$775) to get 20. This means it will take you 20 months before you start to see savings by refinancing or that it will take you twenty months to recoup your closing costs.
Planning to stay in your home less than 20 months? You can relax because refinancing shouldn't be in your future. But if you're planning to stay longer than 20 months, it's time to start shopping for a new loan.