When the time is right to refinance your mortgage, you’ll probably want to make it as painless as possible. It’s a natural inclination to simply contact your current mortgage holder and take them up on one of the many offers they may have made to you through emails and direct-mail promotions. However, to realize maximum savings and make the whole process worthwhile, here are seven important items to put on the to-do list.
1. Know what you owe
Before you trigger a mortgage refinance, review the balance and terms of your current loan. This will help you determine how much you’re likely to save when you take into account prevailing refinance rates, the payoff with your current lender and the fees and closing costs you’ll encounter.
You can also get a good idea of your best possible savings scenario, as well as the minimum acceptable loan terms you’ll want to negotiate.
2. Check your credit score
If your creditworthiness has improved significantly since you took out your existing mortgage, you could be in for a pleasant surprise. A higher credit score can earn you a lower mortgage rate.
Review your credit history for accuracy by getting a free report from AnnualCreditReport.com, the official website set up under the federal law that guarantees free reports for consumers. Then consider purchasing your current credit score from one of the three main credit bureaus. There are many variations of the popular FICO score; be sure to ask for the one most commonly used by mortgage lenders.
Many banks and credit card companies offer free credit scores to their customers. These can be helpful, but you may not be getting the score most relevant to a mortgage application. Research conducted by the Consumer Financial Protection Bureau found that different scoring models can change the credit-quality category for nearly one-quarter of consumers. (For example, from “good” to “average.”)
» MORE: Check your free credit score
3. Put a freeze on new debt
If everything checks out OK with your credit history, lock in your qualifications by resisting the urge to make additional credit card purchases or open new credit accounts. If anything, hoard available cash and pay down any debt that you can. Protecting your credit score can be instrumental in maximizing your mortgage refinance savings.
4. Shop at least 3 mortgage refinance lenders
Research shows that borrowers obtain the biggest savings by shopping at least three lenders. In a recent study, the CFPB found that 47% of consumers consider only one lender when seeking a mortgage, potentially missing out on thousands of dollars of savings by overlooking a home loan lender with a lower interest rate.
5. Refinance away mortgage insurance
If you put less than 20% down on your original mortgage, you’re probably paying for mortgage insurance. That’s a fee that protects the lender in the event of borrower default.
By now, your home’s appreciation may have given you enough equity that further mortgage insurance premiums are unnecessary — but some lenders don’t have to automatically terminate mortgage insurance until the balance on your loan falls to 78% of the original purchase price of your home, or until the midpoint of your mortgage payoff, whichever comes first.
Refinancing away — or at least lowering — your mortgage insurance premiums can provide significant savings, particularly if your original home loan was backed by the Federal Housing Administration, or FHA.
6. Forget cash-out and extended-term refinancing
It’s a common temptation to take a cash-out refinance, which converts your equity to cash that you can spend. Maybe it’s even for worthy causes, like funding a college education or paying off high-interest credit cards.
The thing is, you’re raiding your home’s value — and that can be a slippery slope, especially if home values start heading south again. If you default on the loan, you could lose your home. Or you might decide you want to move in a few years, only to discover that your home equity has been eliminated by that previous spending.
Another possible pitfall: extending the payoff term of your home loan. Sure, it can lead to a lower monthly mortgage payment, but it will greatly increase the interest you’ll pay over the long(er) term.
Real savings come from paying off debt, not adding to or extending it.
7. Evaluate your mortgage refinance strategy
Maybe your current home loan is an adjustable-rate mortgage, and you think interest rates are sure to rise. Or, you have a higher-rate fixed-term loan and believe that a lower-rate ARM is the way to go.
Depending on your circumstances, including short-term and long-term housing needs, it may be time to rethink your mortgage refinance strategy. By taking a close look at various scenarios, you may find that a different type of mortgage better suits your needs and saves you a money.
All set? Prepare for the paperwork
With a firm savings strategy in mind, it’s time to start the application process. If it’s been a few years since you’ve tackled a home loan, prepare yourself for the paperwork. The days of “low doc” or “no doc” mortgages are over.
You’ll likely face more disclaimers and fine print than you’ve seen in a while. And you may encounter your share of LOEs — letters of explanation — requesting that you explain anything from your employment history to random bank deposits.
In the end, it’s likely to be well worth all the effort, as your savings grow with each refinanced mortgage payment.
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