Refinancing Mortgage Considerations

Should I refinance our mortgage to get a lower interest rate? The old rule of thumb was if you are going to stay in your home for a few years, and interest rates drop more than your current rate by 1%, then it will be worth your while to refinance. Meaning since there are closing costs, it may take a few years to make up those costs, with the new lower payment. Ask your mortgage lender to run this analysis for you. You can run them yourself too with the wonderful calculators at DinkyTown.

I have heard about low closing costs mortgages? The last few years many lenders offer mortgages without any fees. They waive some of the costs, such as points and various other fees like the title insurance and inspection costs. They might still have an application fee, which in my experience averages about $500 – $250. These are really nice, because as long as you can lower your interest and thus your payment, and there is not a big fee to overcome, then you can justify refinancing even if staying in your home for a short period of time. Keep in mind, the lender has to make up for the fees they usually charge, so they charge a little higher interest, probably about .25 more.

What else should I think about before choosing to refinance? Make sure that you get quotes of all costs from a few good lenders prior to making your decision. Have the lender run full cost calculations of the options you are considering before you choose. Secondly, compare that analysis to a calculation of the all costs of your current mortgage from now until completion, that way you can see the true net total costs. Lastly, don’t just pick another 30 year mortgage. For example if you are 50 and have 22 years left on your mortgage, don’t just go with another 30 year term or you will be paying until you are 80. Try to always shorten your mortgage to 20 years, 15 years  (as Dave Ramsey always suggests), or less.

Is it easy to refinance? If you have a great credit rating, low other debt and overall good debt to income ratios, then it will be okay, if not expect a longer more difficult process. Real estate people I talk to say the mortgage process is much slower now than ever, so be prepared for a long time to process the paper work.

Is there any benefit to staying with the lender I already have my mortgage with? Some lenders will offer existing clients a low-cost and low rate mortgage and may even not have as stringent underwriting, this is a plus considering my comments above. However it is my experience the interest rate is a little higher than the most competitive rates available.

Are there other costs and things to be mindful of? There are many, so talk to your professional advisor prior to jumping in. A couple of things I think you want to be mindful of are escrow and the new paperwork you will sign. Sometimes the escrow account used for real estate taxes and insurance may have to be adjusted, this could result in requiring of up front cash (or could be added to your mortgage), and/or monies paid out. If you receive money, don’t spend it, put it in savings, pay off debt or maybe better yet, use it pay on the principle of your new mortgage. Also due to the mortgage crisis, I have heard some new mortgage documents have wording in them that may be more restrictive to the borrower. As with all contracts that you sign, be sure to always have an attorney read everything prior to signing.